Local content: a guidance document for the oil and gas ... · PDF fileLocal content A guidance document for the oil and gas industry SECOND EDITION Social responsibility THE GLOBAL

Local contentA guidance document for the oil and gas industry

SECOND EDITION

Socialresponsibility

THE GLOBAL OIL AND GASINDUSTRY ASSOCIATIONFOR ENVIRONMENTALAND SOCIAL ISSUES

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The global oil and gas industry association for environmental and social issues

Local contentA guidance document for the oil and gas industry

SECOND EDITION

2 — Local content: a guidance document for the oil and gas industry

Executive summary 5

Section 1: Introduction 7

Realizing the potential value of local content 8

Some key terms 8

Section 2: Review the local content context 9

Approach to industrial policy and 10industrial competitiveness

Policy, legal and regulatory framework 10

Political drivers of host government objectives 12

Other stakeholder expectations 13

Identifying opportunities and risks for 13value creation

Section 3: Establishing a company strategy 15for collaborating with stakeholders on a shared vision for local content

Defining stakeholder roles under 17a shared vision

Identifying the opportunities 17(demand side analysis)

Opportunities in the project life cycle 17

Characteristics of procurement opportunities 19

Characteristics of workforce opportunities 22

Identifying the local capacity 22(supply side analysis)

Defining roles and timing 23

Exploration phase 24

Development phase 24

Operations phase 24

Decommissioning phase 25

Examples of collaborative actions 25

Special focus on marginalized/ 25vulnerable groups

Setting objectives and monitoring progress 25

Section 4: Set up the organization to 27deliver value from local content

Evaluating the business case 28

Defining the company’s strategy 28for local content

Resourcing requirements 29

Adapting procurement and contracting 31

Communicating opportunities 31

Ensuring tendering and contracting 32processes are clearly understood

Supplier pre-qualification 32

Involving lead contractors and suppliers 32

Identifying and mitigating risks 33

Corrupt practices 33

Adherence to labour, social, human rights 34and environmental standards

Operations in conflict-affected areas 34

Negative impacts of local content 35development efforts on communities

Monitoring and evaluation 35

Company strategy indicators 36

Company action plan indicators 36

References and further reading 37

Annex 1: Local content concepts 43

Annex 2: Framework for policy and legal analysis 47

Annex 3: Stakeholder expectations, roles, 51responsibilities and challenges in local content development

Annex 4: Supply side analysis: baseline study 55and detailed gap analysis

Contents


Figures, tables and boxes

Figure 1: Local content, for whom and type? 12

Figure 2: Varying business arrangements 13counting as ‘local supplier’ in host countries

Figure 3: Elements of the multistakeholder 16process to inform a local content strategy

Figure 4: Local content opportunities 17in the project life cycle

Figure 5: Development phase 18

Figure 6: Illustrative demand and lead times 23for plant technicians

Figure A1: Institutional levels at which host 48countries formulate and enforce local contentrequirements

Figure A2: Influence of constitution on 49Indigenous Peoples’ role in local content

Figure A3: Phased approach to local 60 supplier analysis

Table 1: Key questions for conducting a review 11on policy, and legal and regulatory requirements

Table 2: Oil and gas project phase 20and demand for goods and services

Table 3: Factors contributing to the 22competitiveness of local workforce and suppliers

Table 4: Example of a company’s 30Local Content Action Plan by project phase

Table A1: The various actors and stakeholders 52engaging in the local content space

Table A2: Eleven areas of business regulation 57measured by Doing Business

Box 1: Local content indicators in 36international reporting frameworks

Contents

ACKNOWLEDGEMENTS This document was prepared by the IPIECA Local Content Task Force under the auspices of the Social ResponsibilityWorking Group. IPIECA gratefully acknowledges the assistance of Ana Maria Esteves, Vera Ogorodnikova and EvelynDietsche of Community Insights Group, the principal authors, in its preparation.

To improve the content and utility of this guidance IPIECA sought stakeholder input on a draft prior to publication.Individuals with extensive experience in local content were asked to share their expert views on the content. While itwas not possible to incorporate all feedback, their contributions were invaluable during the drafting process. Reviewersparticipated in their individual capacity and were not asked to represent or speak on behalf of their respectiveorganizations. The list of stakeholders does not suggest full endorsement of the content.

Stakeholders provided their time on a voluntary basis and we thank them for their efforts.

Stakeholders

l Mellissa Case, Bechtel l Nardi Gianluca, CARE International l Chile Hidalgo, FSG l Gosia Nowakowska-Miller, International Finance Corporation (IFC)l Johana Dunlop, Schlumbergerl Casper Sonesson, United Nations Development Programme (UNDP)l Silvana Tordo, World Bankl Wolfgang Kraus, Independent


LIST OF ACRONYMS

BSA Benefit-sharing agreement

CDA Community development agreement

EPC Engineering, procurement and construction

ERP Enterprise resource planning

FEED Front-end engineering and design

FID Final investment decision

FTE Full-time equivalent

GDP Gross domestic product

GVCs Global value chains

HSE Health, safety and the environment

IFC International Finance Corporation

ILO International Labour Organization

KPI Key performance indicator

LNG Liquefied natural gas

M&E Monitoring and evaluation

NGO Non-governmental organization

NOC National oil company

NPV Net present value

NQF National qualification framework

O&M Operation and maintenance

OECD Organisation for Economic Co-operation and Development

PSA Production-sharing agreement

PSC Production-sharing contract

R&D Research and development

SME Small and medium enterprise

TVET Technical and vocational education and training

UNCTAD United Nations Conference on Trade and Development

UNESCO United Nations Educational, Scientific and Cultural Organization

VET Vocational education and training


OVERVIEW

This document offers guidance on understanding anddelivering local content in relation to oil and gas projects.It has two aims: to offer oil and gas resource developerspractical advice on how they can realize the potentialvalue of local content; and to offer all stakeholderssuggestions on ways to help create shared value throughlocal content development.

Local content good practice is based on the idea ofcreating ‘shared value’. In this document, shared value isdefined as a business strategy designed to achieve bothproject competitiveness, and stability and economicdevelopment in the local community and host country.Projects can create shared value by generating andgrowing economic opportunities related to theirworkforce, local supply chain and surroundingcommunities, in ways that also support their bottom line.

While a robust local content strategy is based on countryor regional specifics, a number of general learnings canbe distilled, specifically:

l goals, strategy (plan for delivery), tactics and metricsare country-specific;

l there has to be a long-term, realistic vision anddefinition of success by government and companies;

l a country’s long-term goal should be to diversify theeconomy by growing domestic enterprises capable ofoffering internationally competitive goods andservices;

l transparency is crucial (from bid rounds through totendering); and

l laws, regulations and rules should be developedconsistently and support the process; specialattention needs to be paid when differentgovernment bodies are involved to ensure alignment.

SECTION 1

In the introductory section, local content is defined asthe local resources a project or business utilizes ordevelops along its value chain while invested in a hostcountry. Its main components—the primary focus forthis guidance—are the direct and indirect employmentof nationals in the workforce, and the procurement of

goods and services from companies residing in a hostcountry and/or community. Local content may alsoinclude operations carried out in partnership with localentities, development of enabling infrastructure, theimprovement of domestic skills capacity, or theimprovement of local technological capabilities.

SECTION 2

This section reviews the context for local content,exploring ways through which governments mayincorporate local content into industrial policy andefforts to develop or improve competitiveness. Itdescribes policy, legal and regulatory frameworks thatgovernments may consider and common political driversbehind host government objectives. It also looks at thelocal content expectations of other stakeholders, andconsiders the implications if and when these divergefrom the expectations of government and/or resource-producing companies. Section 2 closes by reviewingopportunities and risks for shared value creation.

SECTION 3

Section 3 focuses on strategies for collaboration in thedevelopment of a shared vision for local content, thecommitment this requires from stakeholders, and theopportunities it offers. It is aimed at companies,governments, international suppliers and contractors,financing institutions, chambers of commerce and othersthat decide to work together on a shared and achievablevision for local content.

This section identifies the local content opportunitiesrelated to the demand side of a project throughout itslife cycle, from exploration, planning, engineering, andconstruction and operation to decommissioning (thedemand side). It then focuses on the local capacitychallenges to local content development (the supplyside). This section suggests that the gaps betweensupply and demand can be addressed by formulatingspecific enterprise and skills development programmesas part of the collaborative strategy.

Executive summary


Executive summary

Section 3 closes with a discussion of stakeholder rolesand a review of the processes for setting objectives andmonitoring progress.

SECTION 4

Establishing an organization capable of delivering valuefrom local content is the focus of this final section. Itdescribes how companies can undertake a business caseevaluation, analysing the costs and benefits of localcontent, in order to develop a balanced and collaborativelocal content strategy. The document presents the typesof local content activities that may be relevant at variousphases in a project life cycle, together with the internalorganizational considerations that can help tostrengthen the effectiveness of programmemanagement. It then describes procurement andcontracting methods that companies have found to beeffective in local content development.

This section also examines the identification andmitigation of risks linked to corrupt practices. It stressesthe importance of ensuring that local content initiativesare implemented in a transparent manner and include astrong due diligence programme, along with appropriatesafeguards and mitigations.

Section 4 closes with a discussion of the need for localcontent programmes to be supported by meaningfulmonitoring and evaluation systems. This will enablemanagers to track progress, demonstrate results andmake adjustments as needed to improve outcomes.

REFERENCES AND FURTHER READING

A References and further reading section lists varioussources of information referred to throughout thedocument, and provides links to a range of additionalresources relevant to each main section.

ANNEXES

The document includes extensive annexes comprising arange of useful tools and practical information, and linksto additional resources.


Section 1

Introduction

This guidance document has two aims:l To offer oil and gas resource developers

practical advice on how they can realize thepotential value of local content.

l To offer all stakeholders suggestions on waysto help create shared value through thedevelopment of local content.


REALIZING THE POTENTIAL VALUE OFLOCAL CONTENT

Many resource developers and their host countriesidentify and target local content objectives as ways tocreate and share value from oil and gas developments.Host countries may use local content as part of anindustrial policy aimed at delivering benefits beyond thepayment of royalties and taxes. For their part, many oiland gas companies take a strategic approach to localcontent efforts in recognition of the wider businessbenefits of creating and sharing value betweenthemselves, local communities and countries; thesecompanies do not view local content obligations simplyas issues of regulatory compliance or as risks to bemanaged.

Local content good practice is based on the idea ofcreating ‘shared value’. In this document, shared value isdefined as a business strategy that views thecompetitiveness of a company and the vitality of thecommunities where it operates as mutually dependent.Projects can create shared value by generating andgrowing economic opportunities related to their localsupply chain and communities, which also support theirown bottom line. This guidance document supports thisspirit of ‘shared value’ and outlines an approach thatencourages producer countries, resource developers,their supply chain and other stakeholders to workcollaboratively. It provides a framework that recognizesthe interdependence of each party’s efforts and thefactors affecting them, and that mid-courserecalibrations may be needed by all stakeholders as theylearn together what does and does not work.

SOME KEY TERMS

Local content is understood to be the local resources aproject or business utilizes or develops along its valuechain while invested in a host country. This may includeemployment of nationals, goods and services procuredfrom companies resident in the host country,partnerships with local entities, development of enablinginfrastructure, the improvement of local skills andcapacity of local businesses, or the improvement of localtechnological capabilities.

This guidance document focuses on the maincomponents of local content, i.e. the employment ofnationals and the procurement of goods and servicesfrom companies residing in a host country.

Definitions of local content vary greatly across, and within,host countries. ‘National content’, ‘Indigenous content’,‘community content’, ‘shared value’, ‘in-country value’,‘local participation’ and ‘industrial benefits’ are some ofthe different terms used, while there is also the conceptof ‘supplier diversity’. Variations in definitions can berecognised, at least in part, by identifying the intendedbeneficiary, and assessing what specifically is beingsought. Resource developers have to manage thevariations in country-specific definitions of local content.Equally, governments and other stakeholders need tounderstand the differences when making comparisonsbetween countries.

Other key terms used in this document are:

l Resource developer and company: these are usedinterchangeably, and refer to an oil and gas company.The terms apply equally to national oil companies(NOCs) or international oil companies (IOCs).

l Producer country: this defines a country involved inthe extraction of oil and gas or processing of oil andgas products.

Section 1

Introduction


Section 2

Review thelocal contentcontext


A local content context review can help a companydecide:

l if engagement in that country is a sound decision;

l if there is potential for local content efforts to addmutually beneficial value; and

l how to work with stakeholders.

A local content context review typically provides:

l an understanding of the host country’s currentindustrial capacity, its approach to industrial policyand the attention it gives to competitiveness of itsindustrial sectors;

l an assessment of local content-related policies, lawsand contractual obligations; and

l an understanding of the stakeholders’ expectations.

APPROACH TO INDUSTRIAL POLICY ANDINDUSTRIAL COMPETITIVENESS

Host governments consider many things whendesigning local content objectives, including thecountry’s general industrial policy and competitivenessof its industrial sectors. Historically, host governmentindustrial policies have generally been informed by oneof two views: one view is that governments shouldminimize interventions, leaving entrepreneurs to makeinvestments based on market forces; the other is thatgovernments should take a strong lead in selectingparticular industries in which companies should beinvesting, and in determining what inputs should beused and what outputs should be produced. However, amore prevalent contemporary view is that governmentsand markets complement each other: governmentsprovide the institutions and infrastructure that allowmarkets to work efficiently and competitively.

Answering the following questions can help oneunderstand a host government’s approach towards, andcapacity for, supporting the creation of shared value:

l What role has the host government decided to playin meeting its local content objectives? Is it activelyengaged in helping specific companies or groups ofcompanies?

l Are there viable forums where industry and otherstakeholders can engage with the host government topromote policies that support shared value creation?

l How competitive is the host country’s resource base,and how diverse and competitive are its non-resource sectors and industries?

l How aware are the host government and otherstakeholders of the influence of institutionalframeworks on the competitiveness of industry?

POLICY, LEGAL AND REGULATORYFRAMEWORK

Host governments may pursue local content objectivesand/or enforce local content requirements through avariety of instruments and at various institutional levels.Table 1 presents the policy arena within whichgovernment objectives are typically translated into localcontent requirements. A systematic review of theselevels helps companies understand and organize hostcountries’ local content objectives and requirements (adetailed framework can be found in Annex 2).

A review can reveal challenges to practical application ofrequirements in dynamic political situations. For example,objectives of current local content policies (level 2) maynot be supported by existing regulations (level 4), whichwere designed to support previous policy goals.Companies may also find that local content clauses incontracts and agreements (level 5) signed in the pastcan be misaligned with more recent local contentpolicies and regulations.

Furthermore, parallel institutional arrangements mayco-exist within a single location. For example, asubnational government may develop a local contentpolicy alongside Indigenous Peoples negotiating localcontent contributions as part of their engagement withresource developers.

Section 2

Review the local contentcontext


Section 2Review the local content context

Table 1 Key questions for conducting a review on policy, and legal and regulatory requirements

LEVEL INSTRUMENT QUESTION

l What international agreements has the country signed that affect local content?

l What international norms and policy ideas are influencing the public policy arena?

l How is the country organized, politically and administratively? At what level(s) ofgovernment do local content expectations and objectives arise? Which public sectorentities are in charge?

l Are there any (semi-)autonomous social groups with collective and constitutionallyrecognized claims to resources?

l How does the national government define local content?

l What role does government define for itself, and for the private sector, in pursuingits local content objectives and meeting citizens’ expectations?

l What industrial policies does the country have that are relevant to the developmentof its oil and gas sector? How coordinated and collaborative is the country’sapproach to the formulation and implementation of industrial policies?

l Does the country have specific local content legislation? Are local content-relevantstipulations covered more generally in sector legislation?

l Is there more general legislation also affecting local content (employment law, taxes,tariffs etc.)?

l Is there legislation concerning specific socio-economic groups (e.g. IndigenousPeoples or women), with local content implications?

l Does the country have specific local content regulations?

l Do sector regulations contain specific local content obligations?

l Are there other regulations that affect local content?

l Do subnational governments set and enforce local content-relevant regulations?

l Do model/negotiated production-sharing contracts (PSCs) contain local contentrelevant references?

l Can parties to PSCs (e.g. national oil companies (NOCs), national privately-ownedcompanies with political connections, etc.) exert additional leverage on pursuinglocal content objectives?

l Do concessions contain local content-relevant references?

l Is it expected or mandated, that resource developers commit to communitydevelopment agreements, good neighbour agreements, benefit-sharingagreements, or similar, with local community organizations or specific socio-economic groups?

Internationalagreements and norms

Country constitutionalfeatures

Policy environmentand objectives

Legislation

Regulations

Government contractsand agreements

Other agreements

Level 0

Level 1

Level 2

Level 3

Level 4

Level 5

Level 6

Stimulate high-value technology transfers,innovation and skills development

Use available technology and labour

Benefit particularsocio-economic

constituencies

Broadeneconomicopportunities

Support economictransformation anddiversification

Reduce pressure on thelabour market (e.g. highyouth unemployment)

Provide opportunities tospecific political and

economic constituencies

Provide (self-) employmentopportunities to neighbouring

communities


POLITICAL DRIVERS OF HOST GOVERNMENTOBJECTIVES

Producer countries do not all share the same policydrivers. This leads to variations in how host governmentsdefine local content and ensure local content objectivesand expectations are met.

To recognize and better understand the objectives andexpectations that apply in a particular country context,two questions can be asked: (i) what positive impacts areexpected to be achieved by the host government’s localcontent measures; and (ii) who is intended to benefitfrom those impacts? These two questions arerepresented by the vertical and horizontal axes,respectively, on Figure 1; the potential implications areshown in the quadrants.

The horizontal axis identifies beneficiaries of localcontent. The left side indicates that local contentmeasures are expected to provide opportunities forspecific socio-economic groups. The right side indicatesthe expectation that local content will provide economicopportunities for a broader group of citizens.

The vertical axis shows the ‘type’ of local contentexpected. At the base is the expectation that local

content will utilize available labour and other inputs. Forexample, in a situation where a producer country faceshigh unemployment, the host government andcommunities may expect the oil and gas sector toprovide employment opportunities for local labourmarket participants (bottom right hand quadrant). At thetop is the expectation that local content will helpstimulate the development of higher value skills andinternationally competitive entrepreneurial capabilities.

A key variant in local content policies and laws is how a‘local supplier’ is defined (see Figure 2). That definitioncan signal a government’s objectives and expectations.For example, some governments focus narrowly on theownership of the suppliers, while others focus on theorigin of goods, and the degree and type of engagementwith nationals.

It is important to note, however, that there is no directrelationship between ownership of suppliers and theactual value retained in the country. For example, adomestically-owned supplier selling imported goods willadd limited local value, while an international supplierusing local inputs, employing local staff and substantiallytransforming or processing goods locally can deliversignificant local value retention.


Figure 1 Local content, forwhom and type?


Even though there is no direct relationship betweenownership and retained value, the use of thesedefinitions can sometimes have unintendedconsequences with definitions. For example, whileprogrammes with ‘ownership’ definitions are usually theeasiest to administer, there is the risk of ‘fronting’ (whensomeone assumes ownership for convenience and doesnot actively participate in the company). In somecontexts, it may be better to focus on where thesuppliers carry out their work, and on what localemployment, training and skills development efforts theyare undertaking. Too much focus on incentivizingcompanies to do work in-country may also haveunintended consequences. For example, if there is ashortage of skilled labour, the hiring of local labour forintense periods of activity, such as onshore construction,may pull local workers away from work that is critical tothe country’s long-term growth prospects, such asinfrastructure projects. (Risks associated with localcontent are discussed in the subsection on Identifyingand mitigating risks on page 33).

Companies can map out country-specific policyobjectives, identifying what benefits are intended andwhich domestic constituencies are the intendedbeneficiaries. Once this information is documented andanalysed, it can lead to insights such as:

l Local content objectives may be designed toachieve multiple and varied outcomes: for example,it may be expected that local communities gainaccess to employment opportunities, and also thatan internationally competitive supply chain industrybe developed elsewhere in the country.

l Public expectations may not be consistent withthe objectives, incentives and consequences ofpolicies, legislation, regulations and/or contractualclauses: for example, people in communities andregions where resources are located and producedmay expect low-skilled job opportunities, while thenational government may be targeting higher-skilledtechnology and innovation-based economicdiversification.

OTHER STAKEHOLDER EXPECTATIONS

When conducting a local content context review, it isnecessary to identify and consider all potential andinterested stakeholders. Obvious stakeholders willinclude local communities where a facility may be built;less obvious stakeholders could be a training institute orinternational development organizations with activestrategies in the area. Taking inventory of stakeholdersand their objectives is important in understanding the fulllocal content context. Annex 3 provides a list of commonstakeholders, typical expectations, potential roles andcontributions, and the challenges they might typicallyface. A guidance tool for identifying and engagingstakeholders can be found in IPIECA, 2012.

IDENTIFYING OPPORTUNITIES AND RISKS FORVALUE CREATION

Country context analysis will help a company tounderstand the legal, regulatory and contractualrequirements with which it must comply. It will alsoenable an understanding of the expectations and higher-level public policy objectives, and can then help toidentify key challenges and opportunities for creating


International supplier

International supplier, registered in the

host country

National supplier

International supplier, withan agency arrangement

with a company owned bynationals and/or residents

International supplier,forming a joint venture with

a company owned bynationals and/or residents

Company owned andoperated by nationalsand/or residents, withnational staff, capital

investments, etc.

Ownership of supplier

Figure 2Varying business arrangements counting as‘local supplier’ in host countries


value. Once the wider country context has beenassessed, the company can then identify both the keychallenges it will face in meeting local contentrequirements and the opportunities local content offersto create value for the project/business. By consideringthe challenges and opportunities from the perspectivesof both the host country and the project, the companywill be better able to help develop a local contentstrategy that enables all parties to share in valuecreation.

Potential opportunities include:

l Training institutes may develop courses that servethe needs of both the oil and gas industry and othersectors.

l The host government (and/or others) may developinfrastructure to strengthen the baseline economy.

l Development plans may provide incentives todevelop certain economic sectors which could belinked with the oil and gas value chain.

l There may be established programmes to developthe SME sector, which could align with the oil andgas industry’s own efforts to develop SME suppliers.

l There may be established programmes to develophistorically under-represented or marginalized groups(e.g. women, Indigenous Persons), or SMEs owned bythem.

l Initiatives may be under way for other industrialsectors (e.g. mining, construction, infrastructure, etc.)that could benefit the oil and gas industry.

Potential challenges include:

l A host government may take a prescriptive approachto local content and be unwilling to engage withindustry to identify shared value opportunities andalign efforts. In this case, the only option is toconsider local content as a compliance exercise and,therefore, as a cost and risk management challenge,rather than an opportunity for shared value creation.

l A host government may set targets that areunrealistic because they exceed the capability and/orcapacity of local resources. The government may seethese aggressive targets as a way to ‘push’ theindustry to do more to accelerate the value retainedin the country. However, they may inadvertently havethe opposite impact by incentivizing ‘fronting’behaviour or establishing uncompetitive and,ultimately, unsustainable businesses.

l Certain objectives may only be feasible in a certainproject phase (e.g. during the potentially labour-intensive construction phase), yet the government’sobjectives may apply in all phases.



Section 3

Establishing acompany strategy forcollaborating withstakeholders on ashared vision forlocal content

Shared objectives

Define stakeholders, drivers and aspirations,potential role and challenges

Shared understanding of local capacity constraints

Costs and benefits

Roles and actions

Indicators and performance management

Define rationale for partnership: sharedinterests and objectives

Identify the potentialopportunities for

local content

Identify the key constraintson local capacity to take up

opportunities

Prioritize capacity constraintsbased on the extent to which

addressing these meetsshared objectives

Evaluate the potential costs and benefitsof addressing capacity drivers and meeting

shared objectives

Refine objectives

Define actions to be taken intra-industry,between industry and government, and

with other stakeholders

Assign appropriate roles to each partner,taking into account capabilities, constraints,

responsibilities for costs

Select indicators thatdefine success against

strategy objectives

Define governance ofcountry strategy

Define approach tomonitoring and evaluation of

country strategy andstakeholder commitments


This section is aimed at companies, governments, international suppliers and contractors, financinginstitutions, chambers of commerce and others that decide to work together on a shared vision forlocal content. Cooperation among oil and gas companies (as well as with companies from othersectors, e.g. mining) is encouraged as a way of ensuring critical mass for local content investmentsand avoiding inefficiencies associated with overlapping programmes.

The term ‘collaborative strategy’ is adopted throughoutthe section and refers equally to a country strategy,subnational regional strategy, a community strategy or atargeted marginalized group (e.g. women, IndigenousPersons) strategy, depending on the agenda defined bythe context. However, an important distinction is madebetween a ‘collaborative strategy’ and a ‘company

strategy’. The former is arrived at through amultistakeholder process, and contains a vision for ‘in-country value’ and sector development beyond a singleproject, while the latter is internal to a single companyand sets out how the company will engage in efforts.Guidance on developing and delivering a companystrategy is provided on pages 28–29.

Section 3

Establishing a company strategy forcollaborating with stakeholders on ashared vision for local content

Figure 3Elements of themultistakeholder process toinform a local content strategySource: adapted from WBCSD, 2013.

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DEFINING STAKEHOLDER ROLES UNDER ASHARED VISION

A collaborative strategy sets out high-level objectives ofstakeholders, roles and responsibilities, and an approachto accountability, monitoring and evaluation.

The process of creating the strategy should include:

l early and strong engagement among stakeholders toensure a thorough understanding of each other’sdrivers and expectations;

l agreement on achievable local content objectives;

l clear, measurable and specific commitments tocollaborate in identifying and investing in localcontent opportunities that offer mutual benefit;

l accountability mechanisms to support thesecommitments; and

l a well-defined leadership role.

Figure 3 details key elements that inform acollaborative strategy. This section highlights four ofthese elements: identifying the potential opportunitiesfor local content; identifying the local capacityconstraints; designing programmes and assigningpartner roles to address these constraints; and indicatormeasurement/performance management. A detailed

list of potential stakeholder expectations, roles,responsibilities and challenges in local contentdevelopment is described in Annex 3.

IDENTIFYING THE OPPORTUNITIES (DEMAND SIDE ANALYSIS)

A good collaborative strategy will consider not just short-term demands of a single project, but also the needs ofthe industry (and interrelated industries) and will have atime horizon that is at least medium term in length. Assuch, a demand-side analysis requires estimates andpotential timelines (on an aggregated basis) for goodsand services and workers for the:

l oil and gas industry; and

l inter-related industry activities.

Opportunities in the project life cycle

Demand varies greatly in volumes, categories andtechnological complexity along the life cycle of projects.The upstream oil and gas life cycle is typically dividedinto exploration, development, operations (production)and decommissioning (see Figure 4). The highest riskand most significant cash flows occur during theexploration and development phases. Typically, localcontent opportunities are low and intermittent duringexploration, numerous but short-term duringdevelopment, medium and long-term during operations,and limited in decommissioning. See Figure 4.

Section 3Establishing a company strategy for collaborating with stakeholders on a shared vision for local content

Figure 4Local content opportunities in the project life cycle


Exploration Exploration (seismic, exploration drilling, appraisal drilling)typically lasts 1–10 years with short intermittent periodsof work that is typically very specialized. Direct workforcedemand is likely to be for less than 100 full-timeequivalent employees (FTEs) working for short periods.Local content opportunities during this phase aretherefore limited. Furthermore, offshore activities,especially those in deep water, generate even fewer localcontent opportunities than onshore projects due to theircomplexity and the specialized skills required.

DevelopmentThe development phase comprises a number of earlyplanning sub-phases, namely feasibility, conceptselection, and front-end engineering and design (FEED),followed by detailed engineering, procurement,fabrication/assembly and construction.

During early development, activity is typically limited tobusiness and technical evaluation, detailed projectdesign and planning, and securing regulatory approvals.It is during this phase, well before capital outlay, thatthe greatest opportunity exists to identify opportunitiesfor generating shared value. Many decisions made inthe conceptual and planning stages of a project canhave a significant impact on the potential for localparticipation. Investments in capacity building remainhigh risk until the final investment decision (FID) ismade at end of FEED.

Feasibility study, concept design and FEEDDuring this phase, local employment and procurementopportunities are limited and short-term, as most workinvolves specialized engineering and projectmanagement services. The direct workforce demandduring this sub-phase is likely to be limited to between10–100 FTEs.

Detailed engineering, procurement,fabrication/assembly, constructionThis stage is typically short and characterized bysignificant and rapid change. Capital expenditure isgreatest during this period, as are labour inputs. In an oiland gas project, the construction workforce can beseveral times larger than the operational workforce,albeit for very short periods of time.

The impacts of construction activity on localcommunities can be significant. Potential impacts caninclude rapid population growth, pressure on the localhousing market, increased demand for local productsand services, and labour shortages, particularly in skilledtrades. Conversely, the winding-down of activity at theend of the construction phase can have a deflationaryimpact, and can put some local businesses at risk if theyhave become overly reliant on income from the project(See also the subsection on the negative impacts of localcontent development on page 35.)


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The development phase often presents numerous butshort-term business opportunities for the local industryand workforce. Depending on the nature of the project(e.g. type of facilities and location), local contentopportunities may vary. For onshore projects, localemployment and procurement opportunities aremedium-to-high and short-term; for offshore projects,opportunities are limited and short-term. The directworkforce demand during the sub-phase is likely to befor thousands of FTEs, with steep scale-up and scale-down over a relatively short time period.

OperationsProduction operations include extracting and processingoil and gas in readiness for distribution and sales. Keyactivities are the recovery of oil and gas to the surfacefor processing and transport, optimization of wells andproduction facilities, and efforts to enhance or maintainproduction. Depending on the type and scale of theproject and external economic conditions, the length ofthis phase typically ranges from 10 to 40 years.

Longer-term opportunities for local businesses andworkforces normally arise in the operations phase.Offshore activities generate fewer local content

opportunities than onshore projects given thecomplexity and high specialization levels required. Directworkforce demand in the operations phase is typicallyhundreds of FTEs.

Decommissioning Decommissioning of onshore oil and gas operations isusually straightforward and requires limited workforceand supplies. Decommissioning of offshore structures ishighly complex and technical, and requires advanceplanning. Local employment and procurementopportunities are limited during this phase. However,closing out a project can involve site remediation, whichprovides opportunity for local content.

Characteristics of procurement opportunities

Table 2 on pages 20–21 lists the categories of goods andservices typically required during each phase. The scaleand range of opportunities for local business participationwill vary according to the type of operation and thematurity of local suppliers. This list is meant to beindicative and should not be considered to be all inclusive.




Tabl

e 2

Oil

and

gas

proj

ect p

hase

and

dem

and

for g

oods

and

ser

vice

s

Sub-

phas

e

Cat

egor

ies

ofgo

ods

and

serv

ices

like

lyto

be

inde

man

d

lSe

ism

ic

lEx

plor

atio

n dr

illin

g

lAp

prai

sal d

rillin

g

lIn

dust

ry-s

peci

fic/

tech

nica

l

lSe

ism

ic s

urve

y an

din

terp

reta

tion

lLa

bora

tory

ser

vice

s

lM

arin

e an

d la

ndsu

rvey

s

lRi

g pr

ovis

ion

lD

rillin

g se

rvic

es, d

rillin

gm

uds,

drill

bits

lM

ud lo

ggin

g, c

orin

g,w

irelin

e lo

ggin

g

lCa

sing

and

run

ning

,ce

men

ting,

per

fora

ting

lW

ell h

eads

, com

plet

ion

equi

pmen

t

lEn

gine

erin

g an

dde

sign

ser

vice

s

lG

ener

ic

lSu

pply

cha

in s

ervi

ces

(frei

ght

forw

ardi

ng,

tran

spor

t, et

c.)

lVe

hicl

e fle

etm

anag

emen

t

lFe

asib

ility

lCo

ncep

t de

sign

lFE

ED

lIn

dust

ry-s

peci

fic/

tech

nica

l

lEn

gine

erin

g an

dde

sign

ser

vice

s

lG

ener

ic

lLe

gal a

nd r

egul

ator

yse

rvic

es

lFi

nanc

ial a

nd r

isk

serv

ices

lRe

crui

ting,

per

sonn

else

rvic

es; t

rain

ing,

heal

th

lIT

/com

mun

icat

ion

serv

ices

lEn

viro

nmen

tal a

ndso

cial

pla

nnin

g

lD

etai

led

engi

neer

ing,

proc

urem

ent,

fabr

icat

ion/

asse

mbl

y, c

onst

ruct

ion

lIn

dust

ry-s

peci

fic/

tech

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l

lFa

cilit

y m

odul

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anuf

actu

ring/

plat

form

con

stru

ctio

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lO

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ssem

bly/

inst

alla

tion

lIn

fras

truc

ture

deve

lopm

ent

(pip

elin

es, f

low

line

s,um

bilic

al)

lSt

orag

e ta

nks

man

ufac

turin

g

lW

ell h

eads

/Ch

ristm

as t

rees

lD

rillin

g eq

uipm

ent

lG

ener

ic

lCi

vil W

orks

lW

eldi

ng

lSt

eel,

basi

c st

ruct

ures

lCo

nstr

uctio

n ra

wm

ater

ial

lIn

dust

rial h

eavy

mac

hine

ry

lO

pera

tion

and

mai

nten

ance

lW

ells

/fac

ility

optim

izat

ion

lEn

hanc

ed r

ecov

ery

lIn

dust

ry-s

peci

fic/

tech

nica

l

lPr

oduc

tion

enha

ncem

ent

lM

odifi

catio

ns t

opl

atfo

rms

lIn

spec

tion

and

repa

ir of

top

side

infr

astr

uctu

re

lRe

serv

oir

man

agem

ent

lW

ell i

nter

vent

ion

and

wor

kove

r

lM

aint

enan

ce a

ndre

pair

lPi

pelin

es

lCo

mpr

esso

r st

atio

ns

lG

ener

ic

lSu

pply

Cha

in s

ervi

ces

(frei

ght

forw

ardi

ng,

tran

spor

t, et

c.)

lVe

hicl

e fle

etm

anag

emen

t

lN

/A

lIn

dust

ry-s

peci

fic/

tech

nica

l

lEn

gine

erin

g

lD

econ

stru

ctio

n

lM

ater

ial d

ispo

sal

lSi

te m

onito

ring

lG

ener

ic

lLe

gal a

nd r

egul

ator

yse

rvic

es

lFi

nanc

ial a

nd r

isk

serv

ices

lIT

/com

mun

icat

ion

serv

ices

lEn

viro

nmen

tal s

ervi

ces

lSi

te s

uppo

rt s

ervi

ces

(cat

erin

g, h

ospi

talit

y,m

aint

enan

ce, w

aste

man

agem

ent,

secu

rity)

lSi

te s

uppo

rtco

nsum

able

s (fo

od,

offic

e su

pplie

sst

atio

nery

etc

.)

PRO

JEC

T PH

ASE

EXPL

ORA

TIO

ND

EVEL

OPM

ENT

OPE

RATI

ON

DEC

OM

MIS

SIO

NIN

G



Tabl

e 2

Oil

and

gas

proj

ect p

hase

and

dem

and

for g

oods

and

ser

vice

s (c

ontin

ued)

Cate

gorie

s of

good

s an

dse

rvic

es li

kely

to

be in

dem

and

(con

tinue

d)

lRe

crui

ting,

HR,

tra

inin

gan

d he

alth

lLe

gal a

nd r

egul

ator

yse

rvic

es

lFi

nanc

ial a

nd r

isk

serv

ices

lIT

/com

mun

icat

ion

serv

ices

lCo

nstr

uctio

n se

rvic

es

lLi

ftin

g se

rvic

es

lEn

viro

nmen

tal s

ervi

ces

lSi

te s

uppo

rt s

ervi

ces

(cat

erin

g, h

ospi

talit

y,m

aint

enan

ce, w

aste

man

agem

ent,

secu

rity)

lSi

te s

uppo

rtco

nsum

able

s (fo

od,

offic

e su

pplie

sst

atio

nery

etc

.)

lRe

plac

emen

t pa

rts

lEn

ergy

(fue

l,el

ectr

icity

) and

chem

ical

s

lU

nifo

rms,

pers

onal

safe

ty e

quip

men

t

lEx

cava

tion

equi

pmen

t

lEl

ectr

onic

equ

ipm

ent

lSu

pply

Cha

in s

ervi

ces

(frei

ght

forw

ardi

ng,

tran

spor

t, et

c.)

lVe

hicl

e fle

etm

anag

emen

t

lRe

crui

ting,

HR,

tra

inin

gan

d he

alth

lLe

gal a

nd r

egul

ator

yse

rvic

es

lFi

nanc

ial a

nd r

isk

serv

ices

lIT

/com

mun

icat

ion

serv

ices

lCo

nstr

uctio

n se

rvic

es

lLi

ftin

g se

rvic

es

lEn

viro

nmen

tal s

ervi

ces

lSi

te s

uppo

rt s

ervi

ces

(cat

erin

g, h

ospi

talit

y,m

aint

enan

ce, w

aste

man

agem

ent,

secu

rity)

lSi

te s

uppo

rtco

nsum

able

s (fo

od,

offic

e su

pplie

sst

atio

nery

etc

.)

lRe

plac

emen

t pa

rts

lEn

ergy

(fue

l,el

ectr

icity

) and

chem

ical

s

lU

nifo

rms,

pers

onal

safe

ty e

quip

men

t

lRe

crui

ting,

HR,

tra

inin

gan

d he

alth

lLe

gal a

nd r

egul

ator

yse

rvic

es

lFi

nanc

ial a

nd r

isk

serv

ices

lIT

/com

mun

icat

ion

serv

ices

lCo

nstr

uctio

n se

rvic

es

lLi

ftin

g se

rvic

es

lEn

viro

nmen

tal s

ervi

ces

lSi

te s

uppo

rt s

ervi

ces

(cat

erin

g, h

ospi

talit

y,m

aint

enan

ce, w

aste

man

agem

ent,

secu

rity)

lSi

te s

uppo

rtco

nsum

able

s (fo

od,

offic

e su

pplie

sst

atio

nery

etc

.)

lRe

plac

emen

t pa

rts

lEn

ergy

(fue

l,el

ectr

icity

) and

chem

ical

s

lU

nifo

rms,

pers

onal

safe

ty e

quip

men

t

lN

on-c

ore

good

s an

dse

rvic

es in

bus

ines

ssu

ppor

t se

rvic

es

lEn

ergy

(fue

l,el

ectr

icity

) and

chem

ical

s

lU

nifo

rms,

pers

onal

safe

ty e

quip

men

t

PRO

JEC

T PH

ASE

EXPL

ORA

TIO

ND

EVEL

OPM

ENT

OPE

RATI

ON

DEC

OM

MIS

SIO

NIN

G


Characteristics of workforce opportunities

Human resources are relevant to local content in threeways:

l direct employment by resource developers and theirfirst tier contractors;

l indirect employment via the various productionlinkages (see Linkage theory in Annex 1); and

l further employment opportunities via theconsumption linkages as those employed directlyand indirectly by the sector spend their salaries andwages in the country (see Linkage theory, Annex 1).This employment channel is also referred to asinduced employment.

It is important for low-income developing countries torecognize that the oil and gas sector offers only limitedscope for the direct employment of unskilled andinexperienced staff. The oil and gas sector’s directlabour demand is typically focused on certified tradesand crafts skills. Typically, these competencies willinclude and require both formal qualifications based ona minimum of lower secondary education and relevantprior work experience.

Indirect employment opportunities through the variousproduction linkages usually require skill levels similar tothose for direct labour, often with a greater variety ofprofiles. Only induced employment offers moreopportunities for lower skilled staff.

IDENTIFYING THE LOCAL CAPACITY (SUPPLY SIDE ANALYSIS)

Local content has the potential to stimulate economicactivity and encourage additional investment andemployment in the local economy. Achieving enhancedeconomic activity is, however, not automatic and isdependent upon the existence of favourablemacroeconomic and microeconomic conditions. Further,achieving globally competitive supply chains andworkforces is challenging. Table 3 lists factors thattypically determine the ability of local suppliers andworkforce to be competitive in terms of cost, quality,volume, scheduling and reliability. These factors vary fromcountry to country and between regions within a country.

The goal of supply side analysis is to identify thechallenges and opportunities associated with meeting


Table 3 Factors contributing to the competitiveness of local workforce and suppliersSource: adapted from WBCSD, 2013

MICROECONOMIC FACTORS(FIRM LEVEL)

MACROECONOMIC FACTORS(COUNTRY’S BUSINESS-ENABLING ENVIRONMENT)

l Human resources and organizational capabilities:managerial and technical skills, operational processes, HSEand quality control.

l Technological capabilities: availability of technology andthe ability to adopt and deploy it; this is particularlyrelevant for industry-specific goods and services with ahigher technology component.

l Access to finance: loan and equity finance for capital andoperational needs; the constraints include high interestrates and collateral requirements that are not feasible forSMEs.

l Access to local infrastructure: availability and quality oflocal infrastructure, roads, utilities.

l Access to procurement: awareness of, and ability to applyfor, opportunities: communication, prequalification, tenderdocumentation and processes.

l Regulatory environment: ease of starting and running abusiness: permits, licensing, inspections, taxation,certification.

l National infrastructure: access to nationwide transportinfrastructure, electricity, telecommunications.

l Labour market: broader educational and training policiesat unskilled, semi-skilled and technical (TVET/VET) andhigher education levels.

l Capital markets: macroeconomic financial situation: theavailability of credit, the maturity of equity markets, andthe size of a country’s overall liquidity pool.

l Investment incentives and import and export regimesthat impact the ability to start and scale up localbusinesses.

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local employment and sourcing expectations. The gapbetween the supply and the demand side can potentiallybe addressed by enterprise and skills developmentprogrammes. In some contexts, the firm-levelmicroeconomic constraints (as described in the left sideof Table 3) can be addressed by individual company- orindustry-led initiatives. In some contexts, public policyinterventions are needed to address constraints in theenabling environment (as in the right side of Table 3).However, as mentioned earlier, there is a growing trendof addressing the full range of constraints throughcollaborative stakeholder efforts that may include the oiland gas industry, government, international financeinstitutions, NGOs and educational institutions.

Annex 4 offers guidance on how to examine the factorsthat influence local capacity. Two levels of analysis areusually required:

l identification of the key constraints on local capacitythat would prevent the take up of opportunitiesprovided by the industry; and

l prioritization of capacity constraints and evaluation ofthe potential costs and benefits of addressing them.

DEFINING ROLES AND TIMING

When defining initiatives to address the capacityconstraints identified by a supply side analysis, andassigning roles and allocating costs, partners need toconsider their respective organizational strengths andconstraints. Workforce and supplier developmentrequires medium-term planning horizons. The earlierthese efforts are started, the more likely the labourmarket and enterprises will be both prepared for thedemand and available in future to serve additionalprojects and sector-related activities. Timely workforceand supplier development is particularly important duringthe construction phase when opportunities are many,but the activity time span is short. In practical terms,companies need to develop workforce curves associatedwith the project at pre-FEED stage.

Figure 6 illustrates the importance of starting early. Leadtimes for development of some skills can be lengthy.

Companies should note the importance of engagingproactively with the government throughout the entireproject life cycle in order to coordinate efforts and ensurelocal content and other industrial policies are aligned withindustry’s demand for workforce, goods and services.


Figure 6 Illustrative demand and lead times for plant techniciansSource: adapted from Schlumberger, 2013


Exploration phase

The high-risk profile of exploration activities constrainsthe ability of resource developers to build local capacitybefore starting the development phase. It is thereforeimportant for government to provide leadership toensure early planning for local capacity development. Toprovide this, government will need to implementindustrial and labour market strategies, including nationaleducation and training systems that align a country’senterprise and human capacity building with industry’spotential needs. During exploration, the dialoguebetween the government and resource developersshould focus on establishing a collaborative process toconduct relevant analysis and develop a strategy forlocal workforce and supplier development.

Development phase

Major contractors (including EPC contractors) typicallyaccount for the majority of local spend and employmentduring the development phase. Collaboration betweenresource developers and major contractors, supportedby shared accountability is therefore advisable. Majorcontractors should be involved early to help developcapacity and to link local content planning andimplementation activities to key engineering,procurement and construction milestones.

The conceptual and planning phase presents anopportunity to guide, and collaborate with, EPC andother major contractors to jointly assess and developsupplier capabilities, to set and monitor realisticperformance indicators, and to plan for demobilization.During FEED, construction and operations, contractingstrategies are developed and present a good opportunityto enable shared value opportunities. At this stage,workforce and supplier surveys and gap analysis canreveal specific opportunities that can focus the attentionof stakeholders. Clear expectations, including roles andresponsibilities, should be documented with majorcontractors. (See Adapting procurement and contractingon page 31 for more details.)

Fabrication, assembly and construction are usuallymanaged by large EPC contractors. Consequently, theability of local businesses/workforce to accessopportunities often depends more on the efforts ofmajor contractors than on oil and gas resourcedevelopers. Including major contractors in the planningfor workforce training and capacity development of localsuppliers is therefore strategic.

A major challenge for project developers is in planningfor local employment and sourcing within tight timelinesto meet peak construction requirements, as there is ashort time period post-FID and before construction starts.Planning for the construction phase requires acollaborative approach between industry and governmentand across industry, taking account of linkages to otherprojects in the oil and gas and other sectors.

Operations phase

The operation phase presents opportunities to developlonger-term, sustainable local capabilities. However, toensure sustainability, progression should be deliberatebut at a realistic pace to ensure that local contentprogrammes can consistently deliver high value to localeconomies.

Partnerships with government, other industry players,and vocational and technical education/highereducation/R&D institutions should focus on investmentswith a longer-term horizon, such as developingcompetitive local value chains and promoting innovationand technology.



Decommissioning phase

The primary focus, both before and in the lead up todecommissioning, should be assisting the localworkforce and businesses to diversify (where practical) toreduce their dependence on the operation and remainviable beyond closure.

Examples of collaborative actions

Examples of initiatives that companies, governments,major contractors and others can implement throughpartnerships to address identified gaps in a range ofspecific and unique contexts are available atwww.ipieca.org/sites/default/files/Local_content_case_studies_2016.pdf. These examples are not prescribed as‘best practice’, but do provide options to consider. Keytopics covered include:

l skills development programmes: considerations forstrengthening technical and vocational educationand training (TVET), and case studies illustrating skillsgap assessments, defining of skills competencystandards, interventions at all levels of education(from primary to post-graduate) and knowledgetransfer for talent acceleration;

l enterprise centres/vendor developmentprogrammes: alternatives for delivery models andconsiderations for implementation are offered, andcase studies of initiatives designed to supportsupplier development, including supplier diversity,community agreements to address the supply/demand gap, community equity ownership in supplierfirms, access to finance, online databases linking localbusinesses to contract opportunities, and partnershipsbetween local and international SMEs to exchangeknow-how and improve access to markets; and

l strategic and substantial investments with a long-term horizon: cluster initiatives for world-classsupplier development, common use infrastructureand investments in access to energy.

Special focus on marginalized/vulnerable groups

In many contexts in which oil and gas companiesoperate, historically marginalized groups (e.g. women,Indigenous Peoples or ethnic minorities) often representlarge portions of the population but are often the leastengaged in shared value opportunities that can resultfrom local content initiatives. Special consideration andcare should be given to having specific objectives and

plans related to these groups in both company plans andin collaborative strategies. Many institutions support suchefforts. See the References and further reading sectionfor additional resources.

SETTING OBJECTIVES AND MONITORINGPROGRESS

Reaching agreements on local content objectives can beaided by including a structured, systematic processwhereby stakeholders provide input into an evaluation oflocal content objectives and compare alternatives usinga number of criteria, including government priorities andthe costs and benefits to diverse stakeholders at anational, regional, community and/or targeted grouplevel. A strong monitoring and evaluation (M&E) systemcan provide stakeholders with valuable information toinform future action.

Roles and responsibilities for the M&E programme shouldbe clearly defined. If there is a lead organization for acountry’s local content stewardship, it would beresponsible for collecting the data from variousstakeholders, then synthesising and reporting it.

Selecting indicators that measure strategic outcomesand impacts, rather than simply focusing onimplementation, can help drive resource sharingbetween the government and other stakeholdersinvolved in informing the strategy. Some indicators thatmay be considered include:

l Agreed stakeholder objectives, i.e. who the localcontent efforts are designed to serve, and thepurpose for which they are intended (e.g. to supporteconomic transformation and diversification, toreduce high youth unemployment, to provideeconomic opportunities to neighbouringcommunities, etc). Approaches that measuremultiplier effects can be used to capture indirect andinduced economic impacts generated by localcontent programmes (See Multiplier effects inAnnex 1 for details)

l Indicators that demonstrate contribution to thecollaborative strategy (see Company strategyindicators and Company action plan indicators onpage 36).

l Indicators related to baseline conditions linked to theobjectives (e.g health of the local economy, humancapital, and ease of doing business). In many


http//www.ipieca.org/sites/default/files/Local_content_case_studies_2016.pdf


countries, government statistics departmentsconduct periodic surveys (census, industry surveys,employment, education, etc.), often supported byinternational institutions (e.g. World Bank).

l Indicators related to local capacity developmentprogrammes that provide evidence of programmeimpact. See the References and further readingsection for information on performance storyreporting.

It is also recommended that indicators be disaggregatedby gender and other categories that isolate for theimpact on historically marginalized/vulnerable groups,such as ethnic minorities, indigenous populations andyouth. In many contexts in which oil and gas companiesoperate, historically marginalized groups have limitedaccess to formal resources. They are also often affecteddifferently by oil and gas operations. Without measuringinputs, outputs and impact for historically marginalizedgroups, M&E may capture only a partial and distortedpicture.



Section 4

Set up theorganization todeliver value fromlocal content


This section addresses how companies can establish an organizational structure, systems andprocedures to deliver value from local content efforts.

EVALUATING THE BUSINESS CASE

A clear understanding of the costs and benefits of localcontent initiatives is necessary for companies to:

l assess the potential trade-offs between respondingto external pressures and internal commercialimperatives, and understand the true benefits of localcontent investments; and

l justify local content budgets that compete with othercorporate priorities, and prioritize investments.

The incentives to pursue local content are widelyaccepted by industry. Local content provides both costsand benefits, though it can be more difficult to quantifythe latter. Examples of some of the costs that oil and gasresource developers have experienced include:

l training and education to increase local human andeconomic capital, and enterprise and workforcecapability and capacity to meet industry demand andstandards;

l delayed revenue stream due to the extended timeframes required for local content development;

l paying premium prices to local suppliers to complywith preferencing requirements;

l increased administrative costs to communicateopportunities at the local level;

l increased transaction costs related to managingmultiple smaller contracts to enhance accessibility tolocal suppliers;

l increased administrative costs in running networkingevents and matching large/international suppliersand contractors with local businesses;

l time allocated to participating in stakeholder dialogueactivities; and

l increased administrative costs associated withcompliance with legal requirements for verification

and reporting (where applicable), and tracking andcompiling key performance metrics.

Tools exist to assess the business value of local contentinitiatives. One such tool is the Financial Valuation Toolfor Sustainability Investments developed by IFC, Rio Tintoand Deloitte. Although the model targets broadersustainability interventions, its principles and corecomponents are applicable to local content. The modelquantifies the risks, creates a net present value (NPV)calculation for a scenario ‘with’ a local contentprogramme, and then subtracts the NPV of the scenario‘without’ a local content programme. The result is theNPV of the investment in local content programmes.

DEFINING THE COMPANY’S STRATEGY FORLOCAL CONTENT

A company’s local content strategy needs to balance thecompany’s internal imperatives against a country’s socio-economic context. It expresses the company’scommitment to the collaborative strategy and how thecompany’s activity will support that strategy, articulatesthe trade-offs that have been made, describes objectivesto guide an internal action plan, sets goals, and definesthe organizational structure and systems required todeliver on the strategy.

Key questions that a company strategy would answerinclude:

l Business case: what are the key business objectivesthe company wants to achieve in terms of localcontent?

l Contribution to collaborative strategy: what are thestakeholder objectives that the company strategyshares?

Section 4

Set up the organization to delivervalue from local content

http://www.fvtool.com


l Definitions: how is local content defined within thespecific country context?

l Demand side analysis: what goods and services/workforce will the operation need over the projectlife cycle?

l Supply side analysis: what potential and actual localsuppliers/workforce are present and to what extentdo they have the ability to meet demandrequirements?

l Gap analysis: how will the gap between supply anddemand be bridged? What adaptations toprocurement and contracting procedures andinvestment in capacity development programmesmight be required?

l Targets: what levels of local content could beachieved by bridging the gap between supply anddemand?

l Organization: what resources are needed to deliverthe company strategy?

l Ongoing stakeholder engagement, communicationand reporting: who is important and/or interested inthe company local content strategy, and how willthey be involved and communicated with?

RESOURCING REQUIREMENTS

The wide range of functions and disciplines required toincrease local content across the project life cycle isevident in the activities listed in Table 4 on page 30; thetable provides a sample high-level local content actionplan at the country/asset level.

Recognizing the cross-functional nature of a companyaction plan, successful implementation requires anumber of internal resourcing elements to be put inplace. Some potential approaches include:

l At corporate/headquarters level:l communication in respect of the corporation’s view

on local content efforts;l governance structure (e.g. internal steering

committee) established for oversight and high levelstrategic direction for local content efforts;

l provision of a roadmap/guidelines tocountries/assets to enable alignment withcorporate/headquarters strategy;

l provision of a roadmap/guidelines on collaborationbetween corporate functions—e.g. procurement/supply chain management, human resourcesmanagement and community/public/externalaffairs; and

l allocation of appropriate resourcing and budget atboth headquarters and country levels.

Section 4Set up the organization to deliver value from local content



Table 4 Example of a company’s Local Content Action Plan by project phase

PHASETYPICAL LOCAL CONTENT ACTIVITIES

POTENTIALLY UNDERTAKEN BYCOMPANY ONLY, OR SHAREDWITH OTHER STAKEHOLDERS

l Institutional analysis and stakeholder analysis

l Preliminary engagement with government, otherindustry and stakeholders to establishcollaborative relationships

l Preliminary demand analysis

l Preliminary baseline assessment of supply

l Agreement with government on local contentstrategies

l Concept selection, accounting for local contentoptimization

l Detailed project demand analysis

l Communication of project demand to localbusinesses and other stakeholders

l Detailed workforce and supplier capabilitysurveys and gap analysis

l Local content plan for detailed engineering,fabrication/assembly, construction

l Embedding of local content considerations aspart of detailed design

l Implementation and monitoring offabrication/construction local content plan

l Supplier matching events

l Local content plan for operations phase

l Training of workforce for operations phase

l Report local content performance to governmentand other stakeholders

l Plan for managing discontinued workforce afterthe end of construction phase

l Determine staircase of capabilities—progressionfrom simple contracts to more complex ones

l Capacity building of suppliers and workforce

l Report local content performance to governmentand other stakeholders

l Decommissioning plan including local impact andmitigation measures

l Advance notice to local businesses andworkforce of decommissioning time frames

l Workforce transitional training

Company

Company

Shared

Shared

Company

Company

Company

Company

Shared

Company

Company

Company

Shared

Company

Shared

Company

Shared

Company

Shared

Company

Company

Company

Shared

Exploration

Development Feasibility,conceptdesign, FEED

Development Detailedengineering,procurement, fabrication,assembly,construction

Operation

Decommissioning


l At country/asset level: competent staff that coverthe following responsibilities:l formulation of the company strategy for a

particular project/asset;l representation at external forums, and in the

collaborative strategy multistakeholder process, ifsuch a process exists;

l project management of action planimplementation, and reporting to the internalsteering committee;

l implementation of actions that fall within the remitof relevant functions, e.g. from new businessdevelopment, government relations, socialperformance, social investment, human resources,supply chain, projects, operations, and health andsafety; and

l coordination of the inputs/resources of allfunctions under whose remit any of theimplementation actions fall.

ADAPTING PROCUREMENT ANDCONTRACTING

Many oil and gas companies have adapted theirprocurement and contracting to increase local businessaccess to opportunities, employing methods such as:

l including local content considerations in tenderprocesses;

l breaking large contracts into smaller ones(unbundling) to create opportunities for smaller localsuppliers; and

l providing guidance for the preparation of tenders.

Before engaging in such methods, it is important toensure that such actions do not contravene nationallegal frameworks or international trade agreements,some of which prohibit preferential selection methodsthat may be considered to be anti-competitive.

Highlighted below are four types of demand-sideintervention: (i) communicating opportunities;(ii) simplified procurement and contracting; (iii) supplierprequalification; and (iv) involving lead contractors andsuppliers.

It is worth noting that these interventions typicallyrequire an increase in costs to the resource developer inthe short term, and need to be weighed against the

business and stakeholder benefits sought over themedium to long term. However, there may beopportunity for a resource developer to workcollaboratively with a multilateral development agency orthe host government’s economic development branchto establish the necessary platform or platforms for thefollowing interventions, with the potential to offset someof the incremental cost.

Communicating opportunities

Two common obstacles to increasing local content are alack of awareness among local businesses ofopportunities and how to access these opportunities,and a lack of understanding of the requirements fortendering. These can be addressed by: informingbusinesses about tendering opportunities; educating themabout standards and evaluation criteria; and familiarizingthem with the company’s procurement systems.

To understand which mechanisms will be effective inreaching the businesses being targeted, it is firstnecessary to understand how local businesses networkand communicate. Some questions to consider include:

l To which technologies do SMEs have access? Forexample, do they have internet and mobile phoneaccess and use? Are these used frequently?

l How do community members most commonlyaccess information on tenders?

l How is other information spread through thecommunity? What are the available local channels?Radio? TV? Newspapers?

l Is there a strong sector of community based or civilsociety organizations? To what extent are communitymembers active in these organizations?

l Are business forums, associations or chambers ofcommerce available to businesses? To what extentdo SMEs participate in them? How strong or weak arethese groups?

Channels to communicate opportunities for localbusinesses include:

l enterprise centres;

l information centres;

l chambers of commerce or business associations;

l procurement team;

l supplier forums;



l reception desk;

l email, SMS, or social media;

l website;

l local radio or newspaper;

l community notice boards; and

l community newsletter.

Ensuring tendering and contracting processes areclearly understood

In some contexts, SMEs can be challenged by complexcorporate procurement processes. The ability of SMEs tomeet oil and gas companies’ stringent tendering andcontracting requirements is often hampered by theirlimited financial, technical and managerial capacity.Some of the ways in which tendering and contractingmay be simplified to support the ability of SMEs toparticipate are listed below:

l Tender documentation requirements: requireditems may include tax clearance certificates,organization charts, shareholder agreements, VATregistration, etc. Requirements can be tailoredaccording to the risk and complexity of the goods orservices being procured.

l Information on the tendering process: regularworkshops open to potential suppliers can provideinformation on the tendering process and on specificrequirements, and can help to manage expectationsand communicate available support. Offeringfeedback on unsuccessful bids can also enhanceunderstanding.

l e-procurement systems: ensure fees are affordable;providers offer local suppliers free or cost-reducedtraining on the use of such systems; data usagerequirements account for more restricted data limits;simpler language and multiple language options areoffered if necessary.

Supplier pre-qualification

When local SMEs are interested in being considered foran opportunity, and proceed to register their businesseson the respective vendor databases of the operator, EPCcompanies and other large suppliers, they often face theneed to use a range of different systems, each with itsown requirements. This introduces an administrative andcost burden to SMEs, without any guarantee that anopportunity will actually become reality.

Stringent pre-qualification requirements may presentanother obstacle. Support can be provided to SMEs tomeet international requirements through co-financedprojects to develop HSE, technical and managerialcapabilities of suppliers, e.g. supplier certification,international accreditation of standards certificationorganizations, and training programmes.

Involving lead contractors and suppliers

The ability to achieve local content goals is heavily relianton how the contracts and procurement functions designtheir contract strategy and gear their tender evaluationcriteria to align the practices of lead contractors andsuppliers. An additional contributing factor is how theresource developer works with the contracted partner todevelop its capacity to deliver.

When planning a typical 3–5 year construction phase, itis important to define the role and responsibilities of thelead contractor. Maximizing local content in theconstruction phase might require commencement ofcapability development one to two years in advance.Early involvement of contractors can help capacitydevelopment and also link local content planning andimplementation activities to specific engineering,procurement and construction milestones.



IDENTIFYING AND MITIGATING RISKS

Corrupt practices

Implementation of local content requirements canexpose resource developers to increased risk ofreputational damage and/or legal liabilities, if not done ina transparent manner and without appropriatesafeguards and mitigations. This risk arises from:

l involvement of government and public officials inthe design and implementation of local contentrequirements where there may be attempts to usethese requirements for personal benefit or to favourfamily members or business or political allies, or othercircumstances where ethnic, tribal or other affiliationscome into play (see also Figures 1 and 2 in Section 1);

l close links to the contracting and procurement(supply chain) activities, the area where corrupt andfraudulent practices are most likely to arise, andwhich could also be open to anti-competitivebehaviours, such as bid-rigging or collusive tendering;

l exposure to potential corrupt practices by thesubcontractor or agents, an area where resourcedevelopers have less leverage in applying safeguardsand mitigations;

l exposure to potential corrupt practices in jointventures with local partners; and

l potential undisclosed conflicts of interest, whichcould stimulate nepotism and other corrupt practices.

Examples of corrupt practices associated with localcontent typically include:

l conflict of interest and favouring based onfamily/business/political/ethnic, etc. affiliation;

l bribes and ’kickbacks’ to local companies to serve asa ‘front’ in bidding processes in order to gain accessto oil and gas contracts (see also Figure 2 inSection 1);

l facilitation payments;

l offering and receiving gifts and hospitality to undulyinfluence business decisions;

l fraud; and

l utilizing a chain of companies (often offshore), toobscure the ultimate beneficial owners, for examplein relation to the award of contracts.

The corporate risk associated with corrupt practices canpartially be addressed through the understanding of acompany’s local content programme (as outlined inSection 1), alongside the design and implementation ofclear contracting and procurement standards, and aneffective compliance programme that addresses therespective bribery and corruption as well as broaderethics and compliance risks. Such a programme shouldtypically be linked and developed within the frameworkof a company’s corporate governance and businessconduct standards. Important elements of such acompliance programme include:

l clear standards, for example, clearly statedprohibition against bribery and corruption in all forms,including facilitation payments;

l communication of anti-bribery and corruptionstandards and requirements to all employees andcontractors from the highest executive position;

l procedures to ensure compliance with applicableanti-bribery and corruption laws, e.g. procedures orguidelines in respect of contracting with third parties,gifts and hospitality, conflicts of interest or setting upventures with local partners;

l mandatory due diligence to know the respectivelocal contractors and suppliers and identify any ‘redflags’, and model anti-bribery and corruption clausesto be used in the respective contracts;

l financial controls that enable a transparent view oftransactions;

l training, such as risk-based training of a company’sstaff and contractors on the key company anti-corruption policy requirements;

l statement of employees’ certification ofcompliance;

l global helpline available for all employees to report aconcern;

l audit programmes to monitor compliance;

l consequence management;

l a clear governance structure; and

l records retention procedures.

‘Red flags’ identified as a part of the mandatory duediligence procedure in respect of local contracts andsuppliers need to be cleared, i.e. clarified and mitigatedbefore the relevant contracts can be entered into.



Examples of ‘red flags’ could include situations where:

l a local contractor/supplier is recommended by agovernmental official;

l a local contractor/supplier is related to, or closelyassociated with, a government official;

l a local contractor/supplier refuses to comply withthe due diligence process (e.g. refuses to provideownership documents or has obscure ownershipstructure) or provides incomplete or inaccurateinformation;

l a local contractor/supplier is a ’briefcase company’and/incorporated in an offshore jurisdiction and/orrequests payments to offshore bank accounts;

l a local contractor/supplier clearly lacks experienceand capability to perform the required scope;

l there is reason to believe that there is, or may be, aviolation of local law or policy (e.g. local tax,competition law), if the arrangements proposed withthe local contractor/supplier are implemented.

In addition, the corruption risk in local content canpartially be addressed through open collaborative effortby various stakeholders. However, where corruption isendemic in the local environment, actions may benecessary that extend beyond the scope of the oil andgas industry. Such efforts may be aimed at enhancingtransparency and accountability, including rules onconflicts of interest, asset declaration, and public accessto information about which entities have been awardedcontracts. The oil and gas industry can support the roleof local business associations in training local SMEs andproviding them with tools and resources for thedevelopment of effective internal control, ethics, andcompliance measures for the purpose of preventing anddetecting corruption (OECD, 2009).

Adherence to labour, social, human rights andenvironmental standards

A common practice in the oil and gas industry is to applyinternational frameworks and standards to managelabour, social, human rights and environmentalperformance. Examples include the International FinanceCorporation Performance Standards (IFC PS), UnitedNations Guiding Principles on Business and HumanRights, Voluntary Principles on Security and HumanRights and various International Labour Organization(ILO) standards. They are used in the development ofmanagement plans to avoid, minimize or mitigate

negative impacts associated with the activities ofcontractors. Mitigation measures include:

l building requirements into the contracts of EPCcontractors and large international suppliers withregard to labour, social and environmentalperformance of local subcontractors;

l evaluation of tenders so that key risks are givenappropriate prominence;

l incentives and punitive measures to achievecompliance;

l induction and training on code of conduct, camprules, interaction with local communities, grievanceprocedures; and

l a system for managing issues in the field.

Operations in conflict-affected areas

Companies’ recruitment and procurement practices, andsupplier and workforce development initiatives, canincrease pre-existing tensions in a community andtrigger conflict. Even in relatively peaceful environments,opportunities created by major investments can altertraditional systems and raise tensions. Recruitment andprocurement could unintentionally favour a privilegedethnic group that tends to have better education, workexperience, access to finance, technology and other



resources. Supplier and workforce developmentprogrammes can also feed into local tensions and fuelconflict through their selection of beneficiaries andpriorities.

Mitigation measures should be based on an accurateunderstanding of any existing or potential conflict and itsprotagonists, and of the spectrum of influence that acompany’s activities may have on such conflict.Measures can include:

l early, consistent and meaningful stakeholderengagement to build trust;

l inclusive and transparent employment policies and‘reconciliation-in-the-workplace’ programmes thatfoster positive inter-group relationships;

l transparency in procurement from local suppliers,and engagement with major contractors to ensureinclusive and transparent procurement;

l investment in long-term skills training programmes;and

l engagement with government and otherstakeholders on economic diversification andinclusive job-creation efforts.

Negative impacts of local content developmentefforts on communities

Local content development programmes can drain thelocal workforce and suppliers from other sectors anddisplace traditional economic activities like farming,livestock rearing, fishing, etc. Communities may growdependent on a project’s employment and supplycontracts, with few livelihood options beyond the life ofthe project. There is also a risk of disturbing powerrelations in the community and affecting social cohesion:for example, opportunities may be taken up by a smallgroup of influential community leaders, and may not bevisible or accessible to the broader community.

Mitigation measures may include:

l ensuring thorough upfront community profiling andstakeholder analysis;

l communication strategies that reach the broadercommunity rather than targeting specific groups;

l investment in developing alternative markets, bypartnering with government and aligning withregional development and diversification initiatives toreduce dependence on the project;

l selecting supplier development and skillsdevelopment implementation partners whounderstand and know how to work across socialstructures; and

l invest in skills and enterprise development in supportservices unrelated to supply chain opportunities.

MONITORING AND EVALUATION

Any local content strategy and action plan should besupported by a meaningful monitoring and evaluation(M&E) system. It enables managers to track progress,demonstrate results and take corrective action toimprove delivery. What gets measured tends to get done.

While a standardized methodology for local contentperformance measurement across industry may enableconsistency and comparability of results, there areseveral barriers to its application. The overview to thisguidance highlighted a lack of uniformity in definitions: indifferent contexts governments and industry usedifferent definitions of ‘local’ and ‘content’, as well asdifferent frameworks to measure and report localcontent. There is also a lack of reliable methods tomeasure the true extent of local value addition.



Local content M&E can be resource intensive. Tomeasure local content accurately, it may be necessary toseparate various aspects of procurement, humanresources, social investment and other activities. In mostoil and gas companies, management information/enterprise resource planning (ERP) systems are sharedglobally by all the company’s subsidiaries. However, ERPsystems are not built to measure local content, andtherefore customized solutions are often needed. Thedesign of such solutions, which aim for replication andstandardization, adds complexity since they need to takeinto account the differences in definitions and the typeof oil and gas projects.

The process of monitoring involves frequently checkingwhether the objectives identified at the outset are beingmet. The process of evaluation happens after a longerperiod and requires additional consideration of whetherthe objectives are valid and whether they should beadapted to changes in the environment.

In contexts where local content-related regulatoryrequirements and contractual provisions exist,minimum parameters for compliance monitoring andreporting are prescribed. Governments may provideindustry with templates for monitoring and reporting,including indicators, measurement methods, reportingformat and frequency, etc. Objectives need to betranslated into a set of key performance indicators(KPIs). Performance measurement should assess bothqualitative and quantitative dimensions of change. Thenumber of indicators to be developed depends on howmany are needed to answer the question, ‘Has theobjective been achieved?’

Three broad categories of indicators need to be includedin local content M&E: strategy; company action plan; andcapacity development programme investments. The firsttwo are described below; the third, programme-levelM&E, is described in the subsection on Setting objectivesand monitoring progress on pages 25–26.

Company strategy indicators

These are indicators that demonstrate companies’contributions to collaborative strategies. Many companiescollect local content data for international voluntaryreporting initiatives, e.g. through the UN Global Compact1,The Global Reporting Initiative2 and IPIECA’s sustainabilityreporting guidance (IPIECA, 2015) (See Box 1). Theseindicators may or may not be relevant to the stakeholderobjectives, or might need to be supplemented by others.

Company action plan indicators

At this level, M&E is internally oriented to the companyand involves monitoring commitment delivery andassisting with problem solving. The metrics selected tomonitor the action plan are indicators for whether thecommitment is on time and within budget. Progress istracked using the company’s usual project schedulingmethods and performance of team members ismonitored through the usual staff performancemanagement reviews.


Box 1 Local content indicators in internationalreporting frameworks

Global Reporting Initiative (GRI)2:

l EC6 Policy, practices, and proportion of spending onlocally-based suppliers at significant locations ofoperation

l EC7 Procedures for local hiring and proportion ofsenior management hired from the local communityat significant locations of operation

IPIECA Sustainability Reporting (IPIECA, 2015):

l SE5 Local content practices

l SE6 Local hiring practices

l SE7 Local procurement and supplier development

1 unglobalcompact.org 2 globalreporting.org

https://www.unglobalcompact.org

https://www.globalreporting.org


References andfurther reading

REFERENCES

IPIECA (2012). Voluntary Principles on Security and Human Rights: Implementation GuidanceTools (IGT). www.ipieca.org/publication/voluntary-principles-security-and-human-rights-implementation-guidance-tools

IPIECA (2015). Oil and gas industry guidance on voluntary sustainability reporting. http://www.ipieca.org/publication/oil-and-gas-industry-guidance-voluntary-sustainability-reporting-3rd-edition

OECD (2009). Good Practice Guidance on Internal Controls, Ethics, and Compliance. Annex IIto the ‘Recommendation for Further Combating Bribery of Foreign Public Officials inInternational Business Transactions’ (the ‘Anti-Bribery Recommendations’).http://www.oecd.org/investment/anti-bribery/anti-briberyconvention/44884389.pdf

Schlumberger (2013). Transforming Reserves into Production—an opportunity for Africa. CapeTown. Schlumberger Business Consulting.

WBCSD (2013). A Framework for Dialogue on National Market Participation andCompetitiveness, Geneva and New York, WBCSD. www.wbcsd.org/nmpi.aspx

References and further reading



FURTHER READING

Section 2: Review the local content context

CSSI (2016). Local Content Laws & Contractual Provisions—country profiles (website). ColumbiaCenter on Sustainable Investment. http://ccsi.columbia.edu/work/projects/local-content-laws-contractual-provisionsThis website provides country profiles for a range of countries, summarizing the provisions in legalinstruments dealing with local content, and highlighting examples of high impact clauses. Theprofiles examine provisions dealing with local employment, training, procurement, technologytransfer and local content plans, as well as local ownership, depending on the country’s approachto, and definition of, local content.

McKinsey Global Institute (2013). Reverse the curse: Maximizing the potential of resource-driveneconomies. www.mckinsey.com/insights/energy_resources_materials/reverse_the_curse_maximizing_the_potential_of_resource_driven_economiesThis report discusses how countries that have large resource endowments can handle them moreeffectively in order to bolster economic development. It includes approaches for policymakers toensure that their resource endowments are used to maximize socio-economic benefits through localcontent, shared infrastructure and economic diversification.

UNCTAD (2012). Extractive Industries: Optimizing Value Retention in Host Countries.United Nations Conference on Trade and Development, New York and Geneva.http://unctadxiii.org/en/SessionDocument/suc2012d1_en.pdfThis document discusses challenges of value retention from the oil, gas and mining sectors andintroduces industrial policy options aimed at the optimization of the local content.

Section 3: Collaborate on a shared vision for local content

Australian Government (2009). Developing a performance story report: user guide (website anddownloads). http://nrmonline.nrm.gov.au/catalog/mql:2162This guide presents one of the frameworks used to measure performance with an emphasis onqualitative indicators. A ‘performance story report’ is a statement about progress towards a projectgoal supported by multiple lines of evidence and describing the causal links that show how theachievements were accomplished.

Ernst & Young (2014). Getting ready for UK shale gas, Supply chain and skills requirements andopportunities. www.ey.com/Publication/vwLUAssets/Getting_ready_for_UK_shale_gas/$FILE/EY-Getting-ready-for-UK-shale-gas-April-2014.pdfThis report provides an example of a country-wide demand side analysis. It looks at the supplychain, skills and shared infrastructure demand of the shale gas industry, maps existing capabilities inthe UK, identifies gaps and provides recommendations for closing the gaps.


www.mckinsey.com/insights/energy_resources_materials/reverse_the_curse_maximizing_the_potential_of_resource_driven_economies


IGC (2012). The Enterprise Map Series (website and downloads). International Growth Centre, London School of Economics and Political Science.www.theigc.org/project/the-enterprise-map-seriesThis website provides baseline information on industrial sectors in a number of countries in sub-Saharan Africa. Each volume in the Series begins with a general overview, followed by a series ofchapters dedicated to each major industry in the country, spanning agribusiness, manufacturing andconstruction. Detailed profiles are provided of selected companies in each market and submarket.

IPIECA (2012). Voluntary Principles on Security and Human Rights: Implementation Guidance Tools(IGT). Module 1, ‘Stakeholder Engagement’, pages 10–21. www.ipieca.org/publication/voluntary-principles-security-and-human-rights-implementation-guidance-tools Module 1 of this document provides guidance and tools for stakeholder identification, engagementand resolution of challenges. The guidance could be applied to an overall strategy for countrystakeholder engagement, including on local content issues.

USAID (2016). Value Chain Development Wiki. (USAID Microlinks website).www.microlinks.org/good-practice-center/value-chain-wikiThis website provides a detailed framework for a supplier gap analysis. The value chain approachseeks to understand the firms that operate within an industry—from input suppliers to end-marketbuyers, the support markets that provide technical, business and financial services to the industry,and the business environment in which the industry operates.

USAID (2016). CARE/MEDA e-Course on Market Analysis and Value Chain Project Design (website).https://www.microlinks.org/training-group/caremeda-e-course-market-analysis-and-value-chain-project-design, This online course provides an introduction to market-based economic development and a standardapproach to conducting market analysis and designing value chain initiatives. It is particularly usefulfor the integration of gender and sustainable livelihoods consideration in the analysis and design ofsupplier development programmes.

VETA/VSO/Tanzania LNG Partners (2014). Pathway to vocational employment in the emergingTanzanian gas sector. A Collaborative Assessment of Vocational and Educational Training Needs.November 2014, Dar es Salaam.https://www.vso.ie/sites/vso_hub/files/ic14071_tanzania_voc_skills_gaps.pdf

Vital Voices (2016). Vital Voices Global Partnership (website). www.vitalvoices.orgVital Voices is an international NGO that identifies, trains and empowers emerging women leaders andsocial entrepreneurs around the globe. Through their ‘economic empowerment’ stream of workthey identify high-potential yet underserved women-owned SMEs and support them by: providingbusiness mentoring programmes and leadership and skills training; providing access to peers, marketsand opportunities; and informing and influencing stakeholders through advocacy and research. Anecosystem mapping report of women entrepreneurs can be downloaded from the website.

WBCSD (2012). A Framework for Dialogue on National Market Participation and Competitiveness(website). The World Business Council for Sustainable Development. www.wbcsd.org/nmpi.aspxThis website provides guidance for building a dialogue between business and government on suppliercompetitiveness to enable local firms’ participation in the value chains of large inward investments andto encourage local economic development. The framework lays out a strategy for achieving improvedcompetitiveness of local firms through shared interests rather than through mandatory requirements.



WBENC and WEConnect (2016). Women Owned (website).www.womenownedlogo.com/about-women-ownedThe Women Owned project is a certification initiative that provides benefits to women-ownedbusinesses, including: access to supplier diversity and procurement executives at multinationalcorporations; access to mentoring, education and capacity development; and opportunities tonetwork with other Women Owned businesses. The initiative is managed by WEConnectInternational (www.weconnectInternational.org) and the Women’s Business Enterprise NationalCouncil (WBENC) (www.wbenc.org).

World Bank (2016). Doing Business: Measuring Business Regulations (website).www.doingbusiness.orgThis World Bank Group website provides comprehensive baseline data on business regulationenvironments in 189 economies and selected cities at the subnational level.

World Bank (2016). Enterprise Surveys: What Businesses Experience (website and downloads).www.enterprisesurveys.orgThis World Bank Group website provides baseline firm-level data on the business environments in135 economies. Surveys include data from more than 130,000 firms, and cover a range of topicsincluding access to finance, competition, performance measures and perceptions regardingobstacles to growth, among others.

World Economic Forum (2015). The Global Competitiveness Report 2014–2015 (website).http://reports.weforum.org/global-competitiveness-report-2014-2015This report provides an overview of the competitiveness performance of 144 economies and canbe used a source of baseline information. It contains a detailed profile for each of the economiesincluded in the study, as well as an extensive section of data tables with global rankings coveringmore than 100 indicators.

Section 4: Set up the organization to deliver value from local content

IFC (2009). Projects and People: A Handbook for Addressing Project-Induced In-Migration.International Finance Corporation, Washington D.C.www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+sustainability/learning+and+adapting/knowledge+products/publications/publications_handbook_inmigration__wci__1319576839994This document provides guidance on managing the risks associated with in-migration and its impacts.

IFC (2011). A Guide to Getting Started in Local Procurement: For companies seeking the benefits oflinkages with local SMEs. International Finance Corporation in collaboration with Engineers AgainstPoverty, Washington, D.C. https://commdev.org/a-guide-to-getting-started-in-local-procurement-for-companies-seeking-the-benefits-of-linkages-with-local-smesThis guide provides tools and resources to help companies increase their local sourcing anddevelop effective local procurement policy.


www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+sustainability/learning+and+adapting/knowledge+products/publications/publications_handbook_inmigration__wci__1319576839994


IFC (2016). Financial Valuation Tool for Sustainability Investments (FV Tool) (Website and downloads). An innovation of the International Finance Corporation (a member of theWorld Bank Group), in partnership with CommDev, Deloitte, MIGA and Rio Tinto. www.fvtool.comThe FV Tool consists of software, a User Guide and other useful supporting information. The FV Toolcalculates a probable range for the NPV of a portfolio of sustainability investments (including thoseaimed at local content development), including both the direct value creation and the indirect valueprotection of these investments. By highlighting the relative value of specific investments, the FV Toolcan help to align the company’s core business objectives with the sustainability investments it makes.

International Alert (2005). Conflict-Sensitive Business Practice: Guidance for Extractive Industries.www.international-alert.org/resources/publications/csbp-extractive-industries-enThis document provides guidance and tools for risk management in conflict-sensitive areas. Itincludes a screening tool for early identification of conflict risk; a macro-level conflict risk and impactassessment tool; a project-level conflict risk and impact assessment tool; and special guidance onkey flashpoint issues where conflict could arise at any point during a company’s operation.

LCS (2010). Unpacking Local Content Metrics and Measurement. Dr Michael Warner, Local ContentSolutions, November 2010.www.localcontentsolutions.com/pdf/SolutionsSeries5.pdfThis LCS briefing document includes an inventory of local indicators commonly used by the industry,together with information on where the data are likely to be sourced from, the level of confidence inthe reported local content, and the administrative simplicity of data collection and reporting. The LCSwebsite at www.localcontentsolutions.com provides a number of other useful resources.

Responsibility assignment matrix or RASCI (Responsible, Accountable, Supported, Consulted,Informed) matrix. http://en.wikipedia.org/wiki/Responsibility_assignment_matrix, The RASCI matrix describes the participation by various roles in completing tasks or deliverables fora project. It is especially useful in clarifying roles and responsibilities in cross-functional/departmental projects and processes.

University of Queensland (2010). Procuring from SMEs in Local Communities: A Good Practice Guidefor the Australian Mining, Oil and Gas Sectors. Table 1, ‘Organisational maturity chart’, pages 17–19.Centre for Social Responsibility in Mining (CSRM), University of Queensland, Australia.https://www.csrm.uq.edu.au/publications/procuring-from-smes-in-local-communitiesThe chart on pages 17–19 of this good practice guide is designed for use as a self-assessmenttool for organizational maturity in local procurement practice, to assist companies in seeing howthey compare with best practice, and to identify opportunities for improvement and track progressover time.

World Bank (2015). A Practical Guide to Increasing Mining Local Procurement in West Africa.Washington, D.C. http://documents.worldbank.org/curated/en/2015/02/23980553/practical-guide-increasing-mining-local-procurement-west-africa. This World Bank publication on local content provides information, guidance and tools to supportdecision making, planning and implementation of local procurement. Key sections are applicable tothe oil and gas sector and to various global locations.



Annex 1:Local content concepts


Local content emerged as a concept in the oil and gassector in the 1970s when resource holding countriesbegan reacting to the enclaved nature of someextractive projects, noting few beneficial linkages to thelocal economy as a result of the foreign investment.Several factors have been cited to explain the enclavednature, including the prevalence in the industry ofintegrated global value chains (GVCs) as well as a low risktolerance and the requirement for specialized knowledgeand capital.

Consequently, local content policy regimes havedeveloped in many countries. Further, the thinking andpractice around local content has also evolved and hasbeen influenced and shaped by a number of relatedconcepts, including:

l linkage theory;

l multiplier effect;

l clusters;

l shared value;

l global value chains (GVCs);

l community content; and

l diversity.

LINKAGE THEORY

Albert Hirschman is credited with describing the variouschannels through which the production of extractiveresources might link with other economic sectors in thegeographies where work takes place, or whereproduction is linked with economic sectors locatedelsewhere (Hirschman, 1977). Channels frequentlydiscussed are:

l Fiscal linkages: these arise when resource revenuesfund public investments and recurrent expenditures.

l Consumption (or demand) linkages: these arisefrom the economic activities created by the spendingof salaries and wages earned by those directly

employed by the extractive resources sectors. Thedemand created by those who benefited from thefirst round of spending creates further positivedemand effects because these ‘second tier’beneficiaries spend their salaries and wages on goodsand services produced in the country.

l Production linkages: these include (1) backwardlinkages, which refer to the goods and servicesrequired for the production of extractive resourcessourced in the host country, and (2) forward linkages,which refer to goods and services produced in thecountry that require the extractive resources as aninput or stimulus. In the oil and gas sector, backwardlinkages relate to what is commonly known as theupstream sector, and forward linkages relate to thedownstream sector.

Recently, a third category of production linkageshas entered into discussion, referred to as (3) side-stream or horizontal linkages. This channelrecognizes that the production of extractiveresources requires auxiliary business services that areshared with, or transferable between, differenteconomics sectors, such as utilities, logistical services,communication and financial services, and skills andtechnological developments.

In general, the local content debate has typically focusedon backward linkages, identifying the procurement ofproduction inputs and the sourcing of labour in the hostcountry. However, this is changing as the scope of localcontent expands. Greater attention is being paid to side-stream/horizontal linkages and the dynamics betweenthe different types of linkages. For example, publicexpenditure and investments in skills development (i.e.fiscal linkages) support all types of production as well asconsumption linkages.

Annex 1

Local content concepts


Multiplier effects

The concept of multiplier effects seeks to identify theextent to which direct spending in the domesticeconomy results in further positive demand effects inthe country. The size of an economic multiplier isexplained in Jensen and West (2002), with twoconnected considerations:

l First, the extent to which resource developerspurchase inputs from the national, regional or localeconomy: such inputs typically include wages forlabour supplied from the local or regional area, andpurchases of goods and services. The more aresource developer sources from the local or regionaleconomy, the more money is directly injected intothe economy.

l Second, the extent to which money spent in thateconomy is retained within it: if there is minimalopportunity for people receiving income to spend iton goods and services in their local or regional area,then not as much money will be kept in the local orregional area. Larger and more diverse regionaleconomies tend to be better at keeping expenditurein their economy and not ‘losing’ it to other regions.

The most popular technique for assessing multipliereffects is input/output (IO) modelling. IO models seek tomeasure the significance of existing economic activitiesand industries and their interdependence. They do so byidentifying the core drivers, the dominant supply anddemand chains, and the bottlenecks to economic growth.

Clusters

Clusters can be defined as ‘geographically proximategroups of interconnected firms and associatedinstitutions in related industries’ (Porter, 1998). Clustersare an alternative way of organizing the value chain(distinct from GVCs). As companies are locatedgeographically close to one another, upgrading mayoccur as they can cooperate relatively easily to developinnovations, notify one another of changes in inputspecifications, launch new products and detect changesin technology and demand. In addition, the geographicproximity can generate economies of scale and positiveexternalities such as lower costs of intermediate inputsor services, better access to skilled personnel, or greaterattractiveness to clients (Webber and Labase, 2010).

SHARED VALUE

Several organizations, including the OECD’s PolicyDialogue on Natural Resource-Based Development(OECD, 2014) and the Harvard Business School (Porterand Kramer, 2011), have advanced the notion ofcreating ‘shared value’, which, in the local content context,emphasizes the process of bringing together the publicand the private sector to pursue a more integratedapproach to local content development. The belief isthat local content efforts will be most successful ifgovernment and industry collaborate to build linkageswith the host country’s economy. Further, efforts will bemost sustainable if structured to be mutually beneficialto both populations and business (e.g. the work positivelyimpacts the cost of doing business in a country over time).

GLOBAL VALUE CHAIN (GVC)

Oil and gas production, similar to many industries, isincreasingly organized within global value chains (GVCs)where the different stages of the production process arespread across wide geographic distances and dividedamong multiple firms. UNCTAD’s data show that almostall developing countries, including the poorest, areincreasingly participating in GVCs (UNCTAD, 2013).Evidence from GVC links in developing countries suggeststhat they can have important developmental benefits:

l GVCs can facilitate access to global markets andintegration in the global economy for developingcountries, which no longer have to develop an entireindustry to generate exports but can focus on fewertasks within industry value chains.

l Participation in GVCs generates employment andmay result in faster GDP and income growth.

l GVCs can be an important avenue for developingcountries to build productive capacity, includingthrough technology dissemination and skill building,opening up opportunities for longer-term industrialupgrading.

However, GVCs can also bring risks for developingcountries:

l Many of the potential development benefits are notautomatic (e.g. technology dissemination, skillbuilding and upgrading). Developing countries canremain locked into relatively low value addedactivities along the chain.

Annex 1Local content concepts


l The location of tasks and activities within GVCs isdetermined by dynamic factors (i.e. relative labourproductivity and cost) and can shift around theinternational production networks of multinationalfirms.

COMMUNITY CONTENT

Community content refers more narrowly to activitywithin a project’s ‘zone of influence’, its ‘directly affectedcommunities’, or its ‘host communities’, where thegeographic boundaries tend to be defined in permittingprocesses. The parameters that are typically drawn uponto identify a project’s local community area include: acertain radius distance; the nearest town(s) with somecommercial capability; within a reasonable dailycommute; where employees live; and immediate hostcommunities (villages or settlements). A form ofcommunity content that specifically targets localIndigenous Groups is sometimes referred to asIndigenous Content.

DIVERSITY

Rather than being defined by individuals or companieswithin a geographic boundary, ‘diversity’ denotes effortsfocused on members of a particular demographic groupsuch as women, indigenous persons or youth. It may bea minority within a geographic boundary (e.g. indigenouspersons) or it may be the majority that constitutes ageographic group (e.g. Blacks in South Africa). Morespecifically, it typically refers to groups that havehistorically been under-represented or marginalizedwithin a geographic boundary vis-à-vis the economy.

ANNEX 1 REFERENCES

Hirschman, A. (1977). The Passions and the Interests:Political Arguments For Capitalism Before Its Triumph.Princeton University Press, Princeton, New Jersey.

Jensen, R. and West, G. (2002). Community EconomicAnalysis. Queensland Government, Department ofPrimary Industries, Brisbane.

OECD (2014). Summary Report of the Second Meeting ofthe Policy Dialogue on Natural Resource-basedDevelopment. Organisation for Economic Co-operationand Development, Paris, June 2014.

Porter, M. (1998). Clusters and the New Economics ofCompetition. In Harvard Business Review, Issue Nov-Dec,pp. 78–90.

Porter, M. and Kramer, R. (2011). Creating Shared Value.In Harvard Business Review, Issue Jan-Feb, pp 1–2.

UNCTAD (2013). World Investment Report 2013—GlobalValue Chains: Investment and Trade For Development.United Nations Conference on Trade and Development.New York, USA and Geneva, Switzerland.

Webber, C. M. and Labaste, P. (2010). BuildingCompetitiveness to Africa’s Agriculture: a Guide to ValueChain Concepts and Applications. The World Bank,Washington D.C.

Annex 1Local content concepts


Annex 2:Framework for policyand legal analysis


This annex provides information supplemental toSection 2, Review the local content context. Section 2identified a number of levels of public policy formulationthrough which countries pursue local content objectivesand enforce local content requirements. These areillustrated in Figure A1. Levels 1 to 6 represent thenational public policy arena within which governmentobjectives are translated into local content requirements.Level 0 reflects international agreements and norms thatcan constrain or enable national local content policies,laws, regulations and contractual stipulations.

This annex provides a detailed framework for conductingan institutional analysis of local content contexts. Theframework allows companies and their stakeholders tounderstand variations and identify challenges that arerelevant for developing company local content strategies.

INTERNATIONAL AGREEMENTS AND NORMS(LEVEL 0)

Level 0 lies outside the national public policy arena butnevertheless affects the local content measures thatproducer countries put in place. There are two cases.The first case is that of internationally imposedconstraints: bilateral and multilateral trade agreementsoften constrain or prohibit signatory countries fromdiscriminating against goods and services sourced froma particular location. The second case is a supportiveinfluence: international norms have shaped thedevelopment of local content policies, legislation,regulations and other policy measures across countries,by transferring policy ideas across jurisdictions.

COUNTRY CONSTITUTIONAL FEATURES(LEVEL 1)

The constitutions of producer countries will have animpact on local content management given that theytypically determine how a country is organized andwhich levels of government are responsible for certainactions. Some countries are federations that arecomprised of several autonomous regions, provinces orstates. The ownership of natural resources, for example,may be held at a national level or subnational level, oreven both. Similarly, the management of the naturalresource (including local content issues) may occur atthe national or subnational level or even at a municipallevel. It is also possible that ownership and managementmay span different levels of government. Difficulties arisewhen different levels of government pursue localcontent objectives in contradiction to the policyobjectives of other levels of government.

Constitutions can also recognize particular socio-economic groups as holders of communal rights. Suchrecognition is, for example, the basis on whichIndigenous Peoples in Australia and Canada can expect

Annex 2

Framework for policy and legal analysis

Nationalpublicpolicyarena

International agreements and norms

Country consitutional features

Policy environment and objectives

Legislation

Regulations

Government contracts and agreements

Other agreements

Level 0

Level 1

Level 2

Level 3

Level 4

Level 5

Level 6

Figure A1 Institutional levels at which host countries formulateand enforce local content requirementsSource: Authors, drawing on Dietsche, 2013


to benefit from the granting of local contentopportunities as part of negotiated benefit-sharingagreements.

POLICY ENVIRONMENT AND OBJECTIVES(LEVEL 2)

Many governments have policies related to local content.These policies may either be stand-alone local contentpolicies for the oil and gas sector (or perhaps morebroadly the extractives sector) or may be embedded inmore general industrial policies.

Policies may address specific subsets of the populationor the overall population of a country. Similarly, policiesmay impact many elements of local content or just oneor two elements.

There can also be significant variation in how hostgovernments define local content and how they goabout ensuring that their own objectives and those oftheir political constituencies are met. Key questions are:

l Who is local content intended to serve?

l What type of local content is sought?

Some producer countries pursue different local contentand broader public policy objectives that are at oddswith each other or, at least, are difficult to reconcile.

Another distinguishing feature at Level 2 is the generalrole that the government assumes in pursuing localcontent, varying between a laissez-faire approach oralternatively, a more rigid and/or interventionistapproach.

In less-developed countries policies related to localcontent often start as a poverty reduction strategyand/or action plans and/or in national developmentplans.

LEGISLATION (LEVEL 3)

Many countries have legislation related to local contentand natural resources. Legislation may be: (i) specificlocal content legislation; (ii) local content clauses in widersector legislation; and (iii) other legislation with localcontent implications.

REGULATIONS (LEVEL 4)

Regulations related to local content may be: (i) specificto the natural resource sector; or (ii) more generalregulations with local content implications.

GOVERNMENT CONTRACTS AND AGREEMENTS(LEVEL 5)

Level 5 reflects the local content stipulations contained incontracts and agreements between government andresource developers. Under contractual regimes, suchstipulations have typically been included in modelproduction sharing agreements (PSAs) (Tordo et al., 2013).A model clause covering the employment and training ofnationals is commonly incorporated into such agreements.

OTHER CONTRACTS AND AGREEMENTS(LEVEL 6)

Level 6 captures contracts and agreements withdeliverables on local content that are agreed betweenresource developers and parties other than the national(or regional) government and/or its semi-autonomousagencies. These third parties could include: (i) localcommunities that are settled around a project and arerepresented by some other form of collective entity (e.g.community trusts or foundations); and/or (ii) communitiesthat can claim communal rights over natural resources orsurface lands located where a project is situated. Whilecommunity development agreements (CDAs) and benefitsharing agreements (BSAs) are prevalent in the miningsector, they can also be found in the oil and gas sector, inparticular in relation to Indigenous Peoples. Figure A2shows the consequences of this constitutional feature atLevels 3 and 6.

Annex 2Framework for policy and legal analysis

Figure A2 Influence of constitution on Indigenous Peoples’ role inlocal content

Constitutionally recognized Indigenous Peoples

Specific legislation on engaging with, and obligations vis-à-vis,Indigenous Peoples (e.g. Australian Native Title legislation

Benefit-sharing agreements between resource developerand Indigenous Peoples

Level 1

Level 3

Level 6


OBSERVATIONS

One observation is that OECD countries tend to be morestrategic in retaining flexibility in levels to allow evolutionand adaptation of industrial policies. By contrast, less-developed countries tend to pursue more aspirationalpolicy objectives by adopting specific laws, regulationsand contractual stipulations while paying less attentionto engaging the private sector in policy-makingprocesses. The challenge with this approach, however, isan inability to recalibrate in the instance of negativeunintended consequences.

A second observation is that while laws, regulations andcontractual stipulations are means to enforce policyobjectives, the organizational structures that underpintheir implementation are equally important. Across allcountries, the interdisciplinary nature of local contentposes a challenge; ideally, several ministries, departmentsand agencies will work collaboratively, not least to alsosupport the supply side of local content, coordinate andsolicit vital information from the private sector, andadjust demand side requirements if these have beenformulated too ambitiously in the first instance, andwhere more achievable and sustainable requirementsare called for.

ANNEX 2 REFERENCES

Dietsche, E. (2013). Sector Legal Frameworks andResource Property Rights. In Dannreuther, R. andOstroswki, W. (eds), Global Resources: Conflict andCooperation. Basingstoke, UK. Palgrave MacMillan.www.palgraveconnect.com/pc/doifinder/10.1057/9781137349149.0017

Tordo, S., Warner, M., Manzano, O. E. and Anouti, Y.(2013). Local Content Policies in the Oil and Gas Sector,The World Bank, Washington, D.C.

Annex 2Framework for policy and legal analysis

www.palgraveconnect.com/pc/doifinder/10.1057/9781137349149.0017


Annex 3:Stakeholderexpectations, roles,responsibilities andchallenges in localcontent development

l Jobs

l Business opportunities

l Other economic benefits

l Supply workforce

l Supply goods and services

l Articulate community perspectives

l Lack of appropriate skills

l Limited access to infrastructure

l Limited access to finance

l Expectations gap—immediate andplentiful opportunities are expected

l Risk of establishing overdependence onproject

Local communities


Table A1 The various actors and stakeholders engaging in the local content space

Annex 3

Stakeholder expectations, roles, responsibilities andchallenges in local content development

POTENTIALEXPECTATIONS

POTENTIAL ROLES AND RESPONSIBILITIES

TYPICAL CHALLENGES

l Industrialization and economicdevelopment

l Promotion of social welfare

l National control of resources

l Provision of stable, predictable andtransparent policy frameworks,including sound macroeconomicmanagement

l Clarity of priorities and developmentof policies economic development

l Competing political, economicand social priorities

l Election cycles

l Institutional capacity to plan,implement and monitor localcontent initiatives

l Trade agreements provisions whenin conflict with local content tactics

Governments and regulatory bodies

l To serve national political andeconomic goals

l Licence compliance

l Control access to resources

l Shareholder and investor responsibility

l Potential oversight and enforcement oflocal content policy, as outlined bystate or regulatory agency

l Helps implement local contentpolicies—as resource developers andas government representatives inpetroleum contracts

l The economic development role maybe at odds with a NOC’s capacity andcommercial objectives

l Conflicting roles in oversight andenforcement of local content policy,and facilitation and implementation ofthe policy

l Institutional capacity to plan, implementand monitor local content initiatives

National oil companies (NOCs)


Annex 3Stakeholder expectations, roles, responsibilities and challenges in local content development

l Develop skills that are in line withmarket demand

l Development of workforce in line withindustry demand

l Limited technical, organizational andfinancial capabilities

Education and training organizations

Table A1 The various actors and stakeholders engaging in the local content space (continued)

POTENTIALEXPECTATIONS

POTENTIAL ROLES AND RESPONSIBILITIES

TYPICAL CHALLENGES

l Localized social and economicdevelopment

l Jobs for association members

l Business opportunities for associationmembers

l Organizing/aligning local business

l Access to information on opportunitiesand contracts awarded

l Addressing local content enablers inregional development plans

l Advisory services to companies

l Limited technical, organizational andfinancial capabilities

Local business associations

l Support economic and socialdevelopment

l Advocacy

l Monitoring of industry andgovernment local contentcommitments

l Limited financial andorganizational capabilities

Civil society organizations

l Economic and social priorities of aidstrategy

International development agencies

l Local content requirements andclauses in tender documents andcontracts with resource developers

l Regulatory requirements

l Employ and train local staff

l Support the development of localworkforce

l Support development of local industry

l Commercial risk posed by weakcapacity in the local supplier market

Major international contractors (EPC, fabrication, O&M)

l Licence compliance

l Access to resources

l Shareholder and investor responsibility

l Employ and train local staff, graduallyreplace expatriates with locals

l Support the development of localworkforce

l Support development of local industry

l Project economics andshareholder returns

l Project life-cycle constraints

l Unrealistic expectations

Oil and gas resource developers

l Fund industry development/ linkageprogrammes

l Finance supporting infrastructure

l Technical assistance

l Dissemination of good practice

l Budget and project cycle

l The scope of interventions may belimited by the aid strategy agreed withthe host government

l Competing aid priorities

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Annex 4:Supply side analysis:baseline study anddetailed gap analysis


This annex offers guidance on how to examine the factorsthat influence local capacity, which can help oil and gascompanies to obtain sufficient contextual information todevelop effective local content strategies and tactics.Comprehensive contextual analysis requires theexamination of two sets of relevant data, i.e. (i) data on ahost country’s socioeconomic conditions and enablingenvironment; and (ii) data on the market conditionsspecific to the oil and gas industry’s needs, including thecharacteristics of the local workforce and enterprises.

BASELINE STUDY

Structural characteristics

The socio-economic indicators typically used to analysethe health of the host country’s economy are:

l (un)employment rate (%);

l employment by industries (%);

l average household income ($);

l incidence of low income households (%);

l persons aged 25–54 with some post-secondaryeducation (%); and

l transfer payments (e.g. unemployment benefits) ($).

(Esteves and Ivanova, 2015.)

In general, rural areas where oil and gas companies tendto operate are somewhat different from urban, morediversified economies. Gathering economic data specificto the rural areas of a country is therefore important, andlikely to reveal that, in those areas:

l employment tends to be lower;

l primary industries are usually the main source ofemployment—measured as a location quotient;

l income is generally lower;

l incidence of low income is less;

l education level tends to be lower; and

l transfer payments tend to be higher (due to a highernumber of children, unemployment, retirees).

Another important indicator of the capacity of the localeconomy is the level of economic dependency on oneor several sectors in the region. The market share of theindustry can be estimated using the ‘location quotient’(Hildebrand and Mace, 1950), or the relativeconcentration of regional employment in a givenindustry (e.g. number of jobs in oil and gas divided by thetotal number of jobs in the region). The higher a localquotient for an industry, the more dependent theregional economy is on that industry, and therefore themore vulnerable it is to fluctuations in the employmentand supplier opportunities linked to that industry. Lack ofeconomic diversification is therefore an important factorfor a host country and oil and gas company to considerwhen formulating a local content programme.

Human capital

Data on education outputs and the organization of acountry’s skills development system are key indicators ofthat country’s level of existing and latent human capital.These include:

l Adult literacy rates.

l Enrolment and completion rates for:l primary education;l secondary education, which may be split into lower

and higher secondary education. (Note: In somecountries vocational education may be consideredpart of secondary education, and there are alsocases where technical education is deliveredalongside higher secondary education andhigher/tertiary education, e.g. dual tracks/degrees);

Annex 4

Supply side analysis: baseline studyand detailed gap analysis


l post-secondary education, including:

- vocational education and training;

- technical education and training; and

- higher/tertiary education delivered atuniversities and other higher educationinstitutions (HEIs).

l The comparative performance of students atdifferent stages in key competence areas (reading,writing, maths, knowledge of science).

l Labour force and labour market statistics, for example:l employment status;l average duration of unemployment by level of

education and skills;l average age of entering the labour market;l level of wages and salaries by level of education

(e.g. measured by years in school) and skills; andl same information as above by demographic group.

l Qualitative data on the education and skilldevelopment system and provider and accreditationorganizations (public and private, national and sub-national).

Data for these indicators can be retrieved fromgovernment education and skills assessments and policypapers, and from UNESCO, ILO, the World Bank, theOECD and other organizations that support educationand skills development. In some countries, dedicatedNGOs compile data on educational attainment, includinggeographic variations and variations by socio-economicconstituencies.

Ease of doing business

Consideration of the overall business environment—constraints, gaps and opportunities in the regulatory andadministrative support mechanisms—should be anintegral part of the supply-side analysis. The ability oflocal entrepreneurs to establish and grow businessessupplying the oil and gas value chain is, in part,influenced by the business environment in a country.

The World Bank Group’s report, Doing Business, providescomprehensive quantitative data to compare businessregulation environments across economies and overtime. Doing Business provides two main types of

Annex 4Supply side analysis: baseline study and detailed gap analysis

Table A2 Eleven areas of business regulation measured by Doing BusinessSource: The most recent Doing Business data for 189 economies can be found at www.doingbusiness.org/data

Procedures, time, cost and paid-in minimum capital to start a limited liability company

Procedures, time and cost to complete all formalities to build a warehouse

Procedures, time and cost to get connected to the electrical grid

Procedures, time and cost to transfer a property

Payments, time and total tax rate for a firm to comply with all tax regulations

Documents, time and cost to export and import by seaport

Starting a business

Dealing with construction permits

Getting electricity

Registering property

Paying taxes

Trading across borders

Movable collateral laws and credit information systems

Minority shareholders’ rights in related-party transactions and incorporate governance

Procedures, time and cost to resolve a commercial dispute

Time, cost, outcome and recovery rate for a commercial insolvency and the strength ofthe insolvency legal framework

Flexibility in employment regulation, benefits for workers and labour dispute resolution

Getting credit

Protecting minority investors

Enforcing contracts

Resolving insolvency

Labour market regulation

Complexity and cost of the regulatory process

Strength of legal institutions


indicators, as shown in Table A2—those that broadlymeasure the complexity and cost of regulatory processesand those that measure the strength of legal institutions.

Local enterprise characteristics

The baseline assessment should also include a profile ofthe characteristics of local enterprises at a sufficient levelof detail to gauge the overall approach to companyprocurement. This type of study differs from the moredetailed enterprise capability assessments, outlined belowin Detailed gap analysis. A more general assessment of thecharacteristics that define local enterprises could focus ondata such as the average age of businesses in theeconomy, average proportion of private versus publicownership in companies, percentage of businessesoperating in the formal versus informal sector, percentageof businesses that hold a bank account, or percentage offirms with internationally-recognized quality certification.

A starting point for an initial assessment of enterprisecapabilities can be the enterprise surveys that someinternational organizations compile periodically. Forexample, the World Bank regularly conducts enterprisesurveys that provide company level data for emergingmarket and developing economies

(www.enterprisesurveys.org). Enterprise maps have beencompiled for some African countries by the InternationalGrowth Centre, London School of Economics (IGC, 2012).More generally, regional comparative or country-specificindustry capability assessments may be available fromresearch as well as international developmentorganizations. Firm registration boards, industryassociations or chambers of commerce can also providean overview of enterprise capabilities by sectors.

DETAILED GAP ANALYSIS

While a basic profile is a useful start when assessing thepotential for local content to materialize, a more in-depthunderstanding of the available and potential humanresources and enterprises, compared with the actualdemands of industry, is necessary to design specificinterventions.

Workforce gap analysis

This type of analysis should identify the gap between theworkforce requirements of the sector and the outputproduced by the host country’s education and skillsdevelopment system; it should also identify measuresthat could be taken to better align these factors.



A gap analysis should include:

l assessment of the current state of the country’s skillsdevelopment and education programmes that can berelated to the oil and gas sector;

l assessment of the quality of these programmesagainst industry benchmarks, international standards,or industry/sector requirements; and gaugingindustry perceptions of the quality of technicalschool and university graduates currently being hiredby the sector;

l assessment of the quantity of graduates thattechnical/vocational schools and universities are ableto produce at the required quality;

l identification of key institutional, curricula, teaching,infrastructural and other capacity gaps that need tobe filled at technical schools and universities in orderto meet these requirements;

l assessment of the extent to which current oil and gasoperations will be able to provide employmentopportunities at the most basic skills level tocommunities surrounding sites, the potential forgrowth of this segment in the future oil and gaslabour market, and realistic options for enhancing skilllevels and/or employability in these communities; and

l assessment of the current and potential demand forwomen employees in the oil and gas industry, andidentification of realistic strategies that couldenhance female labour participation in this sector.

(C2D, 2013.)

To bring the demand and supply sides together, diagnosticstudies should outline and evaluate different options forclosing the identified capacity gaps, using appropriateevaluation criteria such as: short-term priorities, bestpractices in oil and gas education, maximizingemployment, sustainability, feasibility, coherence withgovernment policies, gender and communityconsiderations, deliverability, risk and cost-effectiveness.

Designing programmes to bridge skills gaps

Highlighted below are several issues to consider whendesigning programmes to close skills gaps:

l Skilled workforce quantity gaps take time to address,as this segment requires years of practicalexperience. This highlights the importance ofcollaborative development of a country’scomprehensive labour market projections for the

oil and gas sector, based on realistic trendprojections or different scenarios over the short,medium and long term.

l Support for updating a country’s technical andvocational education and training (TVET) strategymay be needed to bridge the gap between long-termlabour market demand and training provision. Incountries with a nascent oil and gas industry, it wouldbe appropriate to support strengthening the TVETsystem in areas where there is an overlap betweenthe oil and gas sector and other sectors’ demand forlabour, such as civil construction, infrastructuredevelopment, general electrical and mechanical work.

l Merely increasing the supply of TVET graduates doesnot guarantee their employability. A supportingapproach may be to develop a country’s integratedframework of qualifications and training based oncompetency standards, with a curriculum alignedwith the needs of the oil and gas industry.

l To avoid lengthy periods of on-the-job training andcoaching, oil and gas companies and their majorcontractors may need to support the reform ofeducational institutions to ensure that the enhancedtraining is accompanied by experience inprofessional work situations.

l Proactive action might need to be taken if only asmall number of local women is likely to benefit fromnew employment opportunities. This action mightinclude ensuring that women students arerepresented in TVET and university departmentscatering to the oil and gas sector.

l Primary and secondary education support may beneeded to increase the throughput of students thatcan progress to technical and higher education.

DETAILED GAP ANALYSIS OF LOCALENTERPRISES

There are established tools for enterprise capabilityassessments that can be used to inform and shapesupplier development programmes. Applying the toolscan be a resource-intensive exercise, and it cansometimes be prudent to take a phased approach, asshown in Figure A4 on page 62.



Supplier mapping

This phase involves identifying/mapping the businessesacross the full spectrum of goods and services present inthe company’s supply chain. Historic spend analysis andmeetings with company contract owners/end users ofgoods and services will help to build a high-level list ofpurchasing categories to guide the mapping. A list ofexisting suppliers should also be included. The mappingexercise would then involve building on this informationto include the types and nature of local businesses. Othersources of information include Government, Chambers ofCommerce and other association databases.

Purchasing category selection

Purchasing category selection is a tool for prioritizinggoods and services based on criteria such as their potentialfor growth and competitiveness, potential to maximizeimpact, the extent to which there is a lead supplier/contractor presence, or potential for a ‘multiplier’ effectwith other sectors. The selection process is inherentlysubjective, and the objective is to minimize subjectivity.

The purpose of the selection process is to identify whichgoods and services need to be analysed in more detail.Prioritization is typically conducted in a workshop using asimple ‘weight and rate’ spreadsheet, which provides theopportunity for different functions to contribute, such asprocurement, social performance and technicalend users/contract owners.

Value chain analysis

Value chain analysis (USAID, 2016) can be applied toshortlisted goods and services in order to identifyconstraints for local firms’ participation in the oil and gassupply chain and the conditions under which a valuechain and its firms can achieve higher levels ofperformance. The value chain analytical framework looksat the following different stages of the process of supply:

l End market: this level involves engagement withinternal contract owners or end users of goods andservices, to understand their priorities and to gaintheir commitment to developing local content.Questions to ask contract owners include: l What are the risks in increasing local content in

your category?l What do you perceive as the capability barriers

among local suppliers?l What are the pre-qualification/specific

accreditation/quality requirements?l What is the contracting and pricing strategy, and

contract terms?l Is this category affected by a global framework

agreement?l Where precisely is the opportunity, i.e. which work

package/component?l What are the expected volumes over 2–3 years

and the contract value?l Are there opportunities for subcontracting/joint

ventures with international suppliers?

l Inter-firm cooperation: This level involves analysingthe nature and extent of (i) vertical linkages—moreefficient transactions among firms that are verticallyrelated increase the competitiveness of the entireindustry; and (ii) horizontal linkages that can helpreduce transaction costs, create economies of scale,and contribute to the increased efficiency of anindustry.

l Firm-level upgrading: In order to respond effectivelyto opportunities, firms need to innovate to add valueto products or services, and to make production andmarketing processes more efficient. This level ofanalysis involves conducting diagnostics of thegeneric business capability of local firms, namelymanagement, finance, human resources andmarketing, as well as capability dimensions thatdetermine whether the business has the capacity tobe a supplier to the oil and gas sector. This involves


Figure A3 Phased approach to local supplier analysis

Supplier mappingPurchasing category

selectionValue chain analysis Upgrading strategy


assessing health, safety and environment (HSE),quality and business integrity.

l Supporting markets play an important role in firm-level upgrading and can be divided into three maincategories:l financial services (e.g. lending, leasing, capital

investing, factoring);l cross-cutting services (e.g. business consulting,

legal advice, telecommunications, advertising); andl sector-specific services (e.g. testing, certification

services, etc.).

Designing programmes to bridge enterprise gaps

Many oil and gas companies are turning to EnterpriseCentres as vehicles to deliver a set of activities thatprovide businesses in local communities with a range ofsupport services that build their capability to becomevendors. The activities can be grouped into the followingfour main themes:

l Information provision: upcoming opportunities;database of local businesses; website; companyrequirements; submitting tenders via ane-procurement system; options for technicalassistance and financing; liaison with companypersonnel that offer business opportunities;networking events; financial products and providers.

l Business diagnosis: assessment of managerialcapability, HSE and quality performance; marketfeasibility studies; business capability diagnosis.

l Training and mentoring: training; businessimprovement plans; mentoring; monitoring; supportin preparing tenders.

l Provision of facilities/infrastructure: meetingrooms; workstations to access e-procurement;training rooms; internet, telephones, printing andphotocopying facilities.

Sustainability is a key consideration in selecting anappropriate management model for enterprise centres.Rather than reinventing or duplicating programmes, it ismore sustainable to build on existing institutions,structures, etc. through partnerships. The search forpartners involves: surveying what donors, NGOs and othercompanies are doing; coordinating with GovernmentMinistries and programmes; and identifying ongoinggovernment or private/donor initiatives in entrepreneurshipdevelopment, microfinance, training centres, etc.

Designing an enterprise centre with sustainability in mindalso involves starting with an exit strategy. This involvesthinking about who will take over when thefunder/implementing organization no longer exists.Measures need to be put in place to cover items such asrunning costs, maintenance, equipment breakdown andqualified personnel. Working with stakeholders andpartners to build the exit mechanism and time frameinto the project design will ensure that the enterprisecentre will ultimately be run by capable partners and willcontinue to generate benefits (without reliance on theresource developer, either financially or in terms of itsownership and management structures). For instance,the phasing out of company support may have to bestaggered over time to allow stakeholders to adapt.

ANNEX 4 REFERENCES

C2D (2013). Education for Mining Development inEthiopia. Online: C2D Services:www.c2dservices.com/experiences/19?search=ethiopiaBackground study available at:http://globaldialogue.info/C2D%20Education%20for%20Mining%20in%20Ethiopia%20-%20Background%20Study.pdf

Esteves, A. M. and Ivanova, G. (2015). Using Social andEconomic Impact Assessment to guide local supplierdevelopment initiatives. In Karlsson, C., Andersson, M. andNorman, T. (eds.), Handbook of Research Methods andApplications in Economic Geography, pp 571-596.Edward Elgar, Cheltenham. www.e-elgar.com/shop/handbook-of-research-methods-and-applications-in-economic-geography

Hildebrand, G. and Mace, A. (1950). The EmploymentMultiplier in an Expanding Industrial Market: Los AngelesCounty. In Review of Economics and Statistics, Volume32, No. 3, pp. 241-49.www.jstor.org/stable/2937531?seq=1#page_scan_tab_contents

USAID (2016). Value Chain Development Wiki. USAID‘Microlinks’ website, accessible at:www.microlinks.org/good-practice-center/value-chain-wiki


http://globaldialogue.info/C2D%20Education%20for%20Mining%20in%20Ethiopia%20-%20Background%20Study.pdf

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