Local Content in Supply Chain

Many extractives companies have substantial experience managing local content programs, which enhance economic development through local procurement of goods and services, employment, and related initiatives. As host governments exercise increasing control over access to natural resources (especially oil and gas), companies are finding that the social benefits of their investments, including local content, are significant factors in determining overall competitive advantage. Other important factors include expanded global communication networks, trends related to transparency, and broader stakeholder awareness of social issues. As a result, identifying “win-win” solutions that match stakeholder issues and company business needs are essential for enhancing commercial value as well as securing and maintaining a social license to operate.

LEVERAGING BUSINESS FOR DEVELOPMENT

“Local content” typically refers to company spend on the procurement of local goods and services. Some companies also include community development and direct hiring within the “frame” of local content. Regardless of the precise definition, however, local content can be the most tangible intersection between traditional commercial goals and community development since it addresses core business needs – hiring of company personnel and contractors to carry out critical activities – and economic development – employment and building local skills. Surging worldwide demand for materials, energy, and related services from large scale capital projects contributes to the potential commercial value of successful local content programs in helping to avoid mobilization constraints and project delays.

Local content initiatives can benefit various stakeholders:

• Local communities receive immediate benefits such as employment (often with higher pay and better working conditions), skills development, technology transfer, and longer term benefits such as skills transfer through training and direct experience. In addition, successful local content programs also create an ‘economic multiplier’ effect that can help to broaden and diversify the local economy.
• National, regional, and local host governments often participate in extraction projects, resulting in a direct share of profits, and transfer of experience and skill. In the long run, governments at all levels of the economy also benefit from the multiplier effect, as economic growth enhances the tax base and creates direct fiscal benefits. Host governments often make local content targets part of contractual arrangements with extractives (especially oil and gas) companies to secure these benefits.

• “Boom and bust” cycles. Abrupt changes in external factors such as commodity prices, contractual “triggers”, political transitions, or project characteristics can result in substantial social and economic disruption. For example, project spending and hiring levels are highest during project development and construction phases with substantial reductions (and repercussions on the economy) once production commences. It is, however, during the production phase that benefits are the most sustainable, albeit at levels substantially lower than the development phase.
• Dependence: While extractives projects offer a variety of immediate economic benefits, failure to diversify the local and regional economy can create dependence on an individual company or sector. Government and company support for the diversification of local businesses will help them survive and compete once a project ends or moves to a new project phase.
• Disincentives: While contractual local content targets assure host governments and communities of a certain level of local spending, they can be unsustainable if not flexible, carefully crafted, and regularly revisited. Similarly, misdirected local content targets can lead to opportunism among local politicians and questionable practices among suppliers competing for company contracts.
• Cost: As noted above, local content is best when it reflects “win-win” opportunities between companies and the local communities. Overinvestment in local content can drain company resources away from core business.

CREATING SUCCESSFUL LOCAL CONTENT PROGRAMS

The following section describes key steps for creating successful local content.

1. Encourage a predictable regulatory and institutional environment that rewards investment in local content and enables multiplier and diversification impacts across the economy. For example, Trinidad and Tobago devised a “Vision 2020 Country Plan” with company engagement to create an action plan that would promote long term national development goals. In general, input from key stakeholders in government, industry, and civil society is essential to create conducive macroeconomic policies, incentives, and business structures. Continuous engagement among these stakeholders also helps to ensure that such policies and frameworks remain aligned with changing national or local conditions.
2. Integrate local content into broader project & community development planning: Local content is an important subset of broader community impact and development. In this regard, local content should not be implemented in isolation, but rather integrated into project planning and risk assessment as well as broader community development initiatives. Failure to include realistic local content plans in project assessments and company approval processes often leads to underperformance in overall cost, schedule, and other business goals.
3. Conduct a baseline needs/capabilities assessment with key stakeholders to understand community priorities, as well as existing skills. This information can be matched with project needs to identify short, medium, and longer term local content opportunities including areas where investment in capacity building and training may offer mutual company and community benefits. Plans should also anticipate the challenges of “boom-bust” cycles and dependence as these represent risks both for host communities and the project or venture. While a needs assessment is often facilitated by companies, proactive host government involvement can help to expedite agreement on specific targets and/or focus areas for local content.
4. Establish initial short term and long term targets: Once local content initiatives have been identified, establish targets for that are realistic over both the short and long term. Consider partnerships with government or civil society to share accountability for meeting these targets and measuring success.
5. Create decision making processes and partnerships to maximize success: After initiatives are established, important decisions will need to be made on a regular basis to resolve conflicting priorities, address performance issues, and meet local community expectations. Tools should be in place to support decision quality and minimize reputation, safety, and project execution risks. Partnerships with government and civil society are also crucial to ensure capability building, long-term benefits, and to mitigate adverse impacts such as boom and bust cycles (See Partnership Section).
6. Monitor and evaluate local content initiatives with stakeholder participation. The success of local content initiatives should be monitored on an ongoing basis to ensure that goals are being met and/or to identify needed adjustments. Engaging stakeholders in this process will improve data collection and help to communicate impact. Evaluation or “lookback” assessments are also important for determining lessons learned (both for companies and governments) and these can occur after a project has been completed or at key project milestones. Evaluations of social impact can supported by third parties offering statistical and social science expertise, such as a universities (See Monitoring and Evaluation).