Last Updated on Saturday, 2 July 2022, 23:33 by Denis Chabrol
by Attorney-at-Law, Dr. Vivian Williams
Guyanese were struggling ever since the country was wrested from the colonial masters. So, when oil was discovered in the South American country in 2015, expectations of prosperity soared. Consequently, the implementation of Local Content Requirements (LCRs) in the fledging oil & gas sector is greeted with patriotic fervor. It is easy for a country, impaired by the vice of developed countries, to instinctively erect trade barriers in a moment of prosperity. Therefore, it is not surprising that Guyana’s local content regulation is coated with the sweetness of jingoism. In its crudest form, jingoism is the appeal to nationalist sentiments to justify an insular approach to an issue and aggression to other countries.
Local Content Requirements have long protectionist roots in developing as well as developed countries such as the United States, China, India, Russia, Brazil, and Norway. Resource rich countries are increasingly introducing it into their legal framework (Deringer, Erixon, & van der Marel, 2018).
The goal is to increase the use of local inputs and boost domestic industries. Norway is often cited as the success story new regimes seek to replicate.
Despite its noble goals, there is disagreement as to whether LCRs fulfill their purpose (Deringer, Erixon, & van der Marel, 2018). Amidst the disagreement, there is consensus that LCRs must be carefully crafted to avoid unintended consequences such as the Dutch Disease. Put differently, it is dangerous to embrace any policy framework in a resource rich country without careful thought and thorough scrutiny. The dangers of the Dutch Disease are greatest in countries with weak institutional structures.
In this article, I lay the foundation for a series that will examine the prudence or lack thereof, of the Local Content Requirements of one of the World’s fastest growing economies. The purpose is to move us beyond mere jingoistic support for Guyana’s Local Content Act.
Is Guyana’s LCRs Consistent with the Norm?
LCRs usually require foreign companies to give priority to nationals, domestic companies, and locally produced materials when procuring goods and services (Olawuyi, 2019). The distinction is between domestic and foreign markets. It is in this respect, the WTO agreement on Trade-related Investment Measures (TRIMS), allows developing countries to restrict the volume or value of imports. The prevailing meaning of local procurement is locally produced products. You wouldn’t usually find LCRs that promote preference of a subset of firms within the domestic market.
So, Guyana’s Local Content Act deviates from the norm. It draws a red line, separating what it calls Guyanese companies from other firms in the domestic market. A Guyanese company is one that satisfies the following:
· incorporation in Guyana,
· 51% or more Guyanese as beneficial owners
· 75% or more Guyanese in Executive or managerial positions
· 90% or more of the workforce are Guyanese
Therefore, the definition of local content creates preference and tension within the domestic market. Guyanese companies are a mere subset of domestic companies. RAMPS Logistics is an example of a domestic firm that has been denied local content certification. It is claimed that the firm does not fall within the subset of Guyanese companies.
Discriminating in favor of a subset of rival firms over others in the same market, is unusual even in countries with rigid LCRs. Once a company is allowed to do business in the domestic market it is not discriminated against. It is either in or out.
Does the unusual approach of Guyana’s LCRs help or hurt the Goal of local content?
a. Increasing Competition in Domestic Markets
Competition is hindered by arrangements that produce anticompetitive effects by discriminating among competitors within a market. This may occur by:
1. foreclosing rivals from access to a market or necessary input; and
2. erecting barriers to entry.
So, Guyana’s Local Content Act introduces the problem of anticompetitive foreclosure in domestic markets. An arrangement is deemed an anticompetitive foreclosure if it cuts off competitors from a substantial portion of the market. In the case of Guyana’s LCRs, domestic firms that do not satisfy the LCRs will be foreclosed from 90%, 75%, 60%, etc. of markets in various sectors. As Gavil, Kovacic, Baker, & Wright, (2017) put it:
…the terms “exclusion” and “foreclosure” are employed broadly to include practices beyond complete foreclosure that disadvantage rivals by raising their costs, reducing their revenues, or otherwise reducing their access to the market. As an economic matter, complete foreclosure is not necessary for exclusionary conduct to confer market power on the remaining firm or firms.
Guyana’s LCRs mandate that oil & gas companies refuse to deal with certain rival domestic firms. Refusal to deal is one of the mechanisms through which anticompetitive foreclosure is achieved. See Lorain Journal Co. v. United States (1951). Questions I defer for later treatment are:
1. Would the requirement that oil & gas companies refuse to deal with certain domestic firms make them participants of an involuntary horizontal cartel?
2. Could there be legal consequences in and out of Guyana?
There is also the issue of barrier to entry, which is a hurdle that restricts entrants or squeezes existing rivals out of a market. The LCR certification seems like a mechanism to determine who scales and who doesn’t scale the barrier. The Local Content Secretariat seems like a barrier-to-entry check point. The denial of local content certification to RAMPS Logistics is a case in point. The denial could force it out of the market.
b. Regulating Point of Origin of Materials Used Instead of Citizenship of Suppliers
To increase the use of locally produced materials and competitiveness of domestic firms, LCRs focus on the point of origin of materials, not citizenship of suppliers. Guyana Local Content Act is silent on point of origin, focusing instead on the citizenship of suppliers. There is no requirement that a product supplied by a Guyanese company be substantially produced in Guyana or by Guyanese.
So, a Guyanese company could simply act as a middleman. Once it wins a contract it could rely on substantial foreign inputs through vendors or contractors. It is conceivable that a company that uses less locally produced materials to fulfill an order will be favored over one that uses more locally produced materials.
Could the goals of the LCRs be achieve through better means?
One of the problems with Guyana’s Local Content Law is that it lets the horse out of the stable then gallivants through a minefield to restrain it. Instead of letting companies into the domestic market and then discriminate against them, the government could set conditions at the point of entry. This is done through a merger review process.
Merger review sets conditions for foreign firms to partner with or acquire a domestic firm. The review is based on whether the merger, acquisition or joint venture will further competition. If it is determined that a merger, acquisition, or joint venture will have undesirable effects in the domestic market, the deal is blocked. That process is rigorous enough to address upfront, what the LCRs seek to address after a firm is allowed into the domestic market.
The present situation allows mergers, acquisitions, and joint ventures to be approved and then LCRs are used to punish legitimate firms. With all its grandeur, Guyana’s Local Content Act uses three mechanisms to pursue its objectives.
1. Regulation of corporate ownership structure
2. Regulation of foreigners’ participation in corporate governance
3. Regulation of foreign labor participation in the workforce
Meddling in corporate ownership structure is premised on an erroneous assumption. It is assumed that the control and direction of a company is determined by most shareholders. However, Dominant shareholders routinely exercise functional control of companies without owning a majority stake. See (Aminadav & Papaioannou, 2016). Companies will find ways to satisfy the 51% majority Guyanese ownership requirement, while still maintaining control. So, this provision may not be an efficient way to achieve what it sets out to do.
Are LCRs Needed to Regulate Foreign Labor Participation in the Domestic Workforce?
If you believe companies are rational economic actors, you wouldn’t stipulate that 90% of the employees of a domestic firm must be Guyanese. A rational company wouldn’t import labor from a higher price market to a country where it is in abundance at a lower price. A company would have to be an irrational economic actor to import human capital at 20 times the cost it could get comparable labor on the local labor market. Market forces and immigration and labor laws are more efficient ways of addressing foreign labor participation in the domestic market.
The provision is also at odds with statements made by Vice President Bharrat Jagdeo. He announced that the country will have to import labor because the local labor market does not have the capacity to fulfill anticipated demand in the oil & gas sector. What is the purpose of a law requiring companies to have 90% Guyanese employees if demand for labor is greater than supply?
In the words of Vice President Jagdeo, “the economy is overheating”. That translates to implementing a law to regulate an existing condition that will be naturally remedied by changes from transiting to an oil economy. Failure to scrutinize provisions of a law could produce disastrous side effects. Consider the example below.
Suppose there are two competitors in an industry – Company P and Company Y. Suppose Company P employs 2000 Guyanese who make up 85% of its workforce. Company Y on the other hand employs just 100 Guyanese who make up 95% of its total employees. Here, Company P would not meet local content requirements though it employs a significantly greater number of Guyanese. Company Y will satisfy the requirement though it employs 20 times less Guyanese than Company P. The drafters of the Local Content Act overlooked the fact that a higher percentage does not mean a greater quantity.
A Rough Road Lies Ahead
Guyana’s Local Content law is not guaranteed the success its Norwegian counterpart achieved. The circumstances are strikingly different. Norway rolled out its LCRs in 1970 before global trade liberalization led to a clampdown on LCRs as a form of non-Tariff barrier (NTB). Antagonism towards this form of protectionist measure started in the 1980s. So, when Norway rolled out it LCRs, the sea was calm.
Guyana’s Local Content Act is stepping out into the turbulence of trade liberalization. LCRs are now a major concern in Global trade policy. Their existence now ignites major tension and rifts within trading Blocs. They now account for numerous disputes, leading to the imposition of penalties at the World Trade Organization (WTO). So, while Norway escaped the effects of the proliferation of protracted LCR disputes, Guyana will not. It is for this reason, economic nationalism in today’s global climate is much more subtle than the overt jingoist posture of Guyana’s LCRs.
Unlike Norway, Guyana also lacks strong institutions. In the absence of strong institutions, one of the dangers of LCRs is the potential to amplify economic inequalities. So, the soundness of Guyana’s LCRs must be assessed not based on its aspiration. Due consideration must be given to how the law will function in the context of institutional structures, economic inequalities, a culture of corruption, and the political climate. Viewed in this light, the road ahead seems bumpy.
Dr Vivian Williams is a New York-based Attorney-at-Law who is also admitted to a number of Bars in the Caribbean. He holds a Master of Laws in Global Antitrust Law and Economics from George Mason Law School, and a Master of Laws in Intellectual Property Law from Benjamin Cardozo School of Law, Yeshiva University. He also holds a PhD. in Business Administration from Baruch College, City University of New York.
Aminadav, G., & Papaioannou, E. (2016). Corporate Control Around the World. National Bureau of Economic Research.
Deringer, H., Erixon, F. L., & van der Marel, E. (2018). The Economic Impact of Local Content requirements: A Case Study of Heavy Vehicles. ECIPE Occasional Paper – No. 1.
Gavil, A. I., Kovacic, W. E., Baker, J., & Wright, J. (2017). Antitrust Law in Perspective: Cases, Concepts and Problems in Competition Policy. St. Paul: West Academic Publishing.
Lorain Journal Co. v. United States, United States Supreme Court, 1951. 342 U.S. (United States Supreme Court 1951).
Olawuyi, D. (2019). Local Content Requirements in Oil and Gas Contracts: Regional Trends in the Middle East and North Africa. Journal of Energy & Natural Resources Law Vol 37, No 1, 93-117.