Local Content

2. WTO requirements and national constraints on policymaking

As the majority of resource-rich countries are World Trade Organisation (WTO) members, they are bound by certain WTO requirements in their domestic policymaking. WTO agreements on Trade-Related Investment Measures (TRIMs) generally prohibit any quantitative restrictions requiring companies/investor/enterprises to purchase or use products or services of domestic origin. The prohibition is covered by the National Treatment Obligation (NTO) clause. However, 34 WTO members are also considered as “Least Developed Countries” (LDCs), allowing them to deviate from the NTO clause for a defined period of time on the grounds of their “individual development, financial or trade needs, or their administrative and institutional capabilities”.

In addition to the temporary exemption from TRIMS for LDCs, the WTO’s rules for Special and Differential Treatment (SDT) allow developing countries other than LDCs (for example, lower and upper middle income countries, self-proclaimed) to introduce some Local Content policies in order to develop local industries in specific sectors. For example, nascent industries often do not have the economies of scale of competitors from other countries, and need to be protected until they can reach an optimal size.

Common constraints to maximising local content policy in the extractive industries

For many resource-rich countries, reaching local content objectives may be more constrained by a small or weak industrial base and the lack of a skilled workforce than by WTO rules. These limitations can lead to a mismatch between the requirements of international companies and the capabilities of local suppliers. Other constraints can include: 

  • Lack of knowledge, experience and industry background (for example, with scope of work, tendering process, contract liabilities) to adequately provide the required goods and services. This is especially true at the higher technical levels of services (core technical services) required by the sector, where lack of experienced suppliers can pose risks to extractive sector companies.
  • Insufficient scale to provide a range of services or the availability of goods. Often, companies prefer to have a few service providers for a broad range of related services as this is economically more efficient and requires less time to manage contracts. When there are not many adequately-sized suppliers in country, it is more difficult for local suppliers to successfully participate in procurement processes.

  • Inadequate financial capacity to provide goods and services on the scale and contract terms required. Financial capacity constraints range from the ability to pre-finance the required volumes to be supplied to providing sufficient bank guarantee/contract performance bonds. These can be up to 10% of the contract value. 

  • Lack of sufficient companies linked with the extractive industries supply chain, with the requisite education and skills set in their workforces to perform the work required by the operation. 

  • Inadequate management skills and quality assurance in local firms to meet international standards.

  • Lack of goods and services at the levels of quality and sophistication required by international and national oil, gas and mining corporations.