What implications for the global trade framework?

Trade and Investment in Extractive IndustriesThe E15 First Expert Group Workshop

Isabelle RamdooECDPM

13 March 2015

Unpacking local content requirements in the extractive sector

1. Why LCRs?

2. Local content: definitions, scope and depth

3. Instruments: Hard and soft requirements

4. Where have they worked and why?

5. Global regulatory frameworks: What provisions?

6. Way forward: regulate more or regulate better?

Structure of presentation

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• Increasing recognition that extractive resources (ER) have not been sufficiently translated into benefits for the economy and for the people of resource-rich countries.

• Series of policy measures to capture more gains from ER: LCR seen as one way is to stimulate the domestic use of factors of production

• Rationale: address key challenges such as commodity dependency; socio-economic challenges; mitigating and managing social and political risks due to rising expectations

• This potentially creates challenges for mining industry but can also be an opportunity to reduce costs if capacity is available

• Paper focuses on certain types of activities/ linkages that are potentially realistic for the extractive industry.

1. Why LCR?

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• No universal definition of what “local” is or what “content” means. A multidimensional issue.

Key features• Spatial dimension : is ‘local’ related only to the geographic

proximity of the mine or does it have a national dimension? Experience vary (Ghana, Nigeria, Mozambique have some requirements for local-local sourcing or employment)

• Ownership: where is the company based? where does the capital come from?

• Local procurement• Local employment• Share of value addition• Sharing infrastructure (corridors)

2. What are LCRs?

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a. Hard instruments: • Legally binding targets companies need to achieve in terms of

employment or procurement sourced locally. • Where found? in laws, regulations, contracts, tendering

procedures etc. If not applied, may lead to fines or even cancellation of contracts or licenses

Soft instruments:• Non-binding instruments seeking to attain same objective as

above.• Where found? Policy documents and guidelines, tendering

procedures (qualified on basis of competitiveness)

Horizontal incentives:• Instead of putting a requirement on companies, Govt sometimes

gives incentives to (domestic) companies to attain the same goal. E.g fiscal support, financial support to develop local industries or other ‘soft’ industrial policies.

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3. Instruments: hard v/s soft

Percentage of countries with different levels of requirementsInstruments: hard v/s soft

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Source: McKinsey. 2013

Few countries surveyed: all levels of development and from different geographical locations. Key lessons:

LCRs have been more effective when:1. There was the capacity to deliver and industries are competitive

(Norway in its early days for eg.)2. They were temporary and performance-based (Norway)3. They were flexible and adaptive (Norway, Chile, Mozambique)4. There was a balance between regulatory measures and ensuring

the competiveness of companies5. Initiatives are collaborative i.e where industry and government

defined together how to realistically implement objectives of local content (Chile, Norway, Brazil, Malaysia)

Risks of LCRs being a barrier to business when:1. Targets were too prescriptive and no or weak domestic capacity (Indonesia, Nigeria)2. Penalties that can cause license withdrawal (S. Africa, Nigeria)

4. Where have LCRs been used?

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• Most LCRs would be inconsistent with WTO disciplines, unless implemented through government procurement. Key WTO provisions relevant to LCRs are:

1. GATT III.4: Prohibits discriminatory treatment between domestic and foreign firms for like products, if these are mandatory.

2. GATT III.5. Specifically focused on LC, prohibits quantitative regulations for use of products in specific amounts.

3. TRIMS (do not apply to services): prohibits performance requirements

4. ASCM prohibits (i) export subsidies that favour specific industries (LDCs and developing countries with GNP/capita < $1000 exempted) (ii) subsidies linked to LC (Art 3.1b). If subsidies are combined with local content implemented through govt procurement, they will fall under Art 3.1b)

5. GATS Art XVI: Depends in what countries have committed in their schedules

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5. Global regulatory frameworks: what provisions?

Other relevant frameworks:

1. Bilateral Investment Treaties: contain provisions that prohibit, condition or discourage the use of LCRs, such as:

Establishment of joint ventures with domestic participation; Minimum level of domestic equity participation; Location of headquarters in a specific region; Employment conditions; Export conditions; Restrictions on sales of goods or services in the territory where they

are produced or provided; Supply of goods produced or services provided to a specific region or

territory; and Transfer of technology, production processes or other proprietary

knowledge and R&D requirements.Contain ISDS provisions

2. FTAs: new generation of agreements (possibly mega regionals) may have even more restrictions on use of LCRs

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Countries see LCRs as a necessary trade off between short-term efficiency and long-term economic development. If not managed well, may put at risk investment and companies’ operations

Need to find a balanced and pragmatic approach which make economic and political sense.

1. Consolidating the WTO ‘acquis’: How do we prevent the race towards more disciplines in areas not covered by WTO (competition, procurement, SOEs) in RTAs and mega regionals?

a. Can we make better use of transparency mechanism, with (i) A online one-stop shop regarding local content policies (ii) The setting up of a dedicated platform, where issues of concerns can be discussed?

6. Way forward: regulate more or better?

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b. Rules are hard to change but if we think the current ones are not sufficient, can we have a variable geometry approach to allow countries willing to go faster, the space to do so “within the system” while carefully designing a set of protocols and rules of operation to guide the process? Is a plurilateral agreement on investment feasible?

2. Can RECs play a better role within the WTO?

a. On LC, their RoO they can be an interesting alternative to some forms of LCRs and would encourage the development of VCs.

b. On rules, they are good sounding boards for what international frameworks would be acceptable by their constituencies because they themselves set supra-national frameworks. They could have a more formal role at the WTO (when they have the mandate to do so)

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3. Collaborative partnerships

Outside the multilateral system, but this has proved to worked very well. So it’s important to have more private sector platforms, including to exchange experiences around practices.

Some of this exist, but the conversations should not happen in silos, i.e companies speaking only to companies or with govts but they should also include other stakeholders around the same table.

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