The heading of yesterday’s Sunday Stabroek column by Professor Clive Thomas “Why local content measures are considered ‘backward backdoor protectionism?”, while framed as a question, conveys in my view, an unfortunate negative connotation about local content policies. Dr. Thomas holds the prestigious and influential position of Presidential Advisor on Sustainable Development and his writings will no doubt help to shape national policies. Admittedly, the two preceding columns seemed more disposed to local content requirements (LCR) in oil and gas contracts but in this latest column, I am less sure.
Oil discoveries have been made in deepwater areas off Guyana, which means that the first time we will be able to use our oil is after it has been shipped off to a refinery and re-imported into Guyana. If the advisers, policy makers and the managers of the economy, choose to think that local content is not an important matter, the public needs to understand that the major difference between when the first oil flows and now, will at best be manifested in lower domestic fuel price and the balance going into the public revenues. Under Guyana’s model Production Sharing Agreement, there is no separate tax revenue: the Government’s share of profit oil includes the taxes. What this means is that we can use our share of profit oil as we see fit: the Government can sell the oil on the domestic market at reduced prices, or put the value into the Consolidated Fund, or a combination of the two. At this stage, the Constitution allows only for a single Consolidated Fund and would need to be amended to create a Sovereign Wealth Fund.
Dr. Thomas’ column yesterday seeks to summarise two reports on local content policies in the petroleum sector. The first is by the United Nations Conference on Trade and Development (UNCTAD) and the other by the World Bank. I do not share Dr. Thomas’ view of these as examples of “even more formidable body of empirical studies examining the operations of LCRs in the oil and gas sector”. Guyana has certainly gone through an intellectual transformation from the days when the World Bank-endorsed IMF’s Economic Recovery Programme (ERP) was parodied as Empty Rice Pot by the leadership of both the PPP and the WPA.
Guyana needs to have a serious, informed and dispassionate debate on local content policies, in which the writings and statements of every participant is challenged with respect and objective responses. I believe that the Natural Resources Minister is making a genuine effort to have that debate as a prelude to formal legislation which must come well before 2020. He deserves the best possible advice.
Let me also draw attention to a few of the debatable matters from the publications of UNCTAD and World Bank dealt with in Dr. Thomas’ series:
– That local content requirements (LCR) “should be administered by institutions of high standing”. What we need is not another expensive layer of opaque bureaucracy but regulations which require Comply or Explain and that these requirements be built into the Exploration and the Production Agreements with penalties for violations.
– UNCTAD’s recommendation that LCRs should be “calibrated”, and therefore, “implemented orderly over time.” Oil is a non-renewable resource and does not offer lots of scope for any extended calibration. Can someone please go back and look at the Cambior – Government of Guyana Mineral Agreement for gold exploration at Omai?
– LCRs are “second best solutions.” A look at the model Production Sharing Agreement confirms that we have already lost the opportunity for the “first best solution” and we need to grasp at the available second best solutions before it is too late.
– That cost-benefit appraisals should precede the setting of all LCRs targets. Why do we need to reinvent the wheel? There are scores of examples and experiences from which to draw.
– From his perspective, it is hard to imagine how Guyana (with its limited capability) can resist what he predicts will be a determined push-back against LCR’s. First, it is the law and second, it is unbelievably cowardly and a defeatist approach by any host country which has sovereignty over the resources.
– That the World Bank Study concludes that “[w]hile local content policies have the potential to stimulate broad-based economic development, their application in petroleum-rich countries [has] achieved modest results”. That quotation leaves out some important qualifying words. Even if space constraints necessitated the exclusion of the very important words “which is necessary to alleviate poverty and achieve the United Nation’s Millennium Development Goals (MDGs)” to qualify “broad-based economic development”, the reader should have been alerted by the insertion of the ellipsis.
Guyana needs to honour its contractual obligations and be a good host and partner to international investors and oil companies. But it must never hesitate to pursue the national interest, assert its rights, and hold all investors accountable.