1. Scoping the capital
budgeting implications of
local content development
legislation
Evidence from new adoption countries
(e.g., Nigeria and Ghana)
Centre for Energy, Petroleum and Mineral Law and Policy
University of Dundee
Dr Ayodele Asekomeh

2. Content/Outline
 What is “local content”?
 Local Content and FDI in perspective
 Some background…
 Capital budgeting implications
 Research Questions
 Research Approach
 The Issues
 Prognosis
2

3. What is “local content”?
 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)
3

4. What is “local content”? (cont’d)
 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
4

5. Local Content and FDI in
perspective
 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
5
regulate FDI (Qiu and Tao, 2001)

6. Local Content and FDI in
perspective (cont’d)
 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)
6

7. Some background…
 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)
7  The Norwegian Model; Trinidad and Tobago

8. Some background…(cont’d)
 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
8 international operators or IOCs

9. Some background…(cont’d)
Contextual differences and suitability of role-models
9 (Source: Thurber et al., 2005)

10. Capital budgeting implications –
Research Questions
 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
10 increased domestic activity

11. Capital budgeting implications
(cont’d) – Research Approach
 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
11 of the local content legislations

12. Capital budgeting implications
(cont’d) – The Issues
 Costing of inputs;  Compliance and
 Financing (securing reporting costs e.g.,
project finance with submission of Nigerian
domestic banks); Content Plan;
 Contractual issues and  Preferential treatment;
“locked-in” terms re quotations and
global supply chain competitive bidding
partners and providers; (margin determination;
 Quality issues; game theory?);
 Project management  Contribution to Local
constraints; Content fund: what
benefit?
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 Perceived risks

13. Capital budgeting implications
(cont’d) – Prognosis
 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
13
energy markets] would be constrained

14. References
 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
14 Briefing Paper AFP BP 05/01, Chatham House

15. References (cont’d)
 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
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