Analysis- Diversity & Inclusion – Guyana’s Local Content Law: An Opportunity to Pursue Equity Governance and a Nationalist Agenda

Posted by: Denis Chabrol in Opinion Sunday, 17 July 2022, 8:07 0

Last Updated on Sunday, 17 July 2022, 8:07 by Denis Chabrol

by Attorney-at-Law Dr Vivian Williams

Attorney-at-Law, Dr. Vivian Williams.

Through this series of articles, we set out on a journey with the deafening drums of jingoism beating in our ears. The lyrics of local content justification combines with a melody that is irresistible. A nationalist agenda is a glorious thing when harnessed to address pressing national issues. One pressing issue in Guyana and across the world, is diversity, inclusion, and a sense of belonging within spaces diverse peoples share. Feelings of exclusion are the seeds of growing conflict in Guyana and abroad.

Governments are therefore taking a proactive role in promoting diversity and inclusion. They are leveraging the size of public procurement to push private actors to adopt more inclusive practices. Local content extends that leverage into private procurement. It is therefore a feature of competition and local content laws in countries with historically disadvantaged groups or where wealth inequality is pronounced. In addressing local content in Guyana, Baluch & Rambarran acknowledge that “by creating shared value Guyana can achieve its overall National Inclusive Economic Development…goals[i]”.

This article examines bright spots and blemishes in Guyana’s local content law to explore how it could ease social, economic, and political problems that have hampered the true potential of a resource rich country. Local content is indeed a good and necessary thing that any sensible government should pursue. However, the way it is conceptualized in Guyana may create implementation challenges that impede progress toward diversity and inclusion. Further, the government should not miss a glorious opportunity to mitigate a problem that has chafed the nation all its life.

On the Bright Side

On the bright side, Guyana’s local content law is simple and straight forward. Simplicity makes administration and interpretation of the law easy. The lesson from around the world is that ambiguity in policy formulation, imprecise wording, or targets that lack clarity, make enforcement difficult[i].

Another good feature of the law is the commitment to periodic review. Volatility in markets make periodic adjustments necessary to prevent adverse effects. Particularly, legislative draftsmen cannot fully predict the range of creative means that would be deployed to circumvent the law. So, it is good that there is a commitment for periodic review.

A commitment to listen and make adjustments is particularly important for Guyana. The country is new to local content regulation and petroleum production, having only discovered oil in commercial quantities in 2015. Therefore, a great deal of the necessary enforcement infrastructure is not in existence. Further, petroleum production is transforming the business landscape. Consequently, predictions cannot be cast in stone and decisions makers cannot proceed with their heads in the sand.

Because of institutional weaknesses and known challenges in implementing local content, strong resolve is necessary for the new law to even stand a chance. The strong protectionist approach Guyana has taken will attract risk seekers that will try to game the system. If they succeed, they will import corrupt practices and a rotten corporate culture that could erode the corporate landscape.

However, resolve without a proper enforcement mechanism would not be sufficient. The factors that will determine the extent to which firms will be deterred from breaking the law are the:

Cost of Non-compliance to firms
Benefit from Non-compliance, and
Probability of detection and successful prosecution

The Cost of Non-Compliance vs Benefit of Non-Compliance

To be effective, the nature and extent of punishment must consider the benefit from non-compliance and the probability of detection and successful prosecution. If the benefit from non-compliance significantly exceeds the cost of deviance, firms may elect non-compliance as a strategy and incorporate any fine imposed as an expense for doing business.

Guyana’s local content law makes it easy for firms to hedge their bet. It imposes a fixed fine across the board. There are some problems with this strategy. First, it discloses the precise cost of deviant behavior irrespective of the magnitude of the deviance and the cost to society. So, a firm could easily determine, upfront, whether compliance or non-compliance is more profitable. Second, if a firm chooses non-compliance as its strategy, it is likely to pursue it on an elaborate scale to offset the cost of sanction if caught. Consequently, the sanction will have a higher level of deterrence on smaller enterprises than larger more aggressive firms.

A more effective approach would create uncertainty about the cost of non-compliance. Sanction could range from a fixed minimum fine to a maximum that disgorges a non-compliant firm of the rewards obtained from non-compliance. It may also include other nonmonetary sanctions that serve as a disincentive to cheat. Unscrupulous firms should be made to internalize the cost of the harm from breaking the law.

Probability of Detection and Successful Prosecution

How successful the enforcement agency will be in detecting and prosecuting defaulters depends on factors such as, the allocation of resources, the investigative infrastructure and authority, and the culture of the host country. Enforcement is not a costless exercise. So, success will depend on the resolve to pump resources into the enforcement agency.

The weaker the enforcement capacity the lower the probability of detection and enforcement will be. In such a case, the penalty would have to be higher to effectively deter violation of the law. Alternatively, a weak enforcement agency could enlist whistle blowers through an incentive scheme. Since a small Local Content Secretariat with inadequate investigative tools, is tasked with enforcing Guyana’s local content law, weak enforcement is anticipated.

Guyana has a record of ineffective enforcement of laws and sanctions against corporate entities. Despite police powers, agencies have been unable to secure compliance by small, unsophisticated businesses. So, firms might predict a low probability of successful prosecution and therefore elect to make rings around the Local Content Secretariat.

Part of the problem is, Guyana’s approach to local content law relies heavily on a sanction regime. Sanction regimes are only successful when high enforcement could be guaranteed. The lesson from countries across the world is that corporate misconduct is hard to detect and successfully sanctioned even with very robust enforcement mechanisms. So, a mix of sanctions and incentives have been found to be more effective and efficient. Therefore, a hybrid between protectionist and liberalized approaches to local content is recommended.

The hybrid approach uses push/pull factors to achieve success rather than the big-stick approach adopted by Guyana. A big stick is only useful if you could catch cheaters. Moreover, a hybrid approach provides an opportunity to remedy social, economic, and political problems. One such opportunity is the promotion of diversity and inclusion.

An Opportunity to Promote Diversity

Local content provides an opportunity for Guyana to address social and political issues that hamper its development. It could deescalate tension by creating a more inclusive society. This could be achieved by providing for diversity and inclusivity. Many countries provide for inclusion of historically disadvantaged groups in the ownership, management, and employment structure of companies. For example, South Africa’s Broad-Based Black Economic Empowerment program (BBBEE) gives preferential treatment to government tender offers made by companies that partner with local black-owned entities. Additionally, South Africa’s Competition Laws provides for a greater spread of ownership, to increase the ownership stakes of historically disadvantaged persons[i]. The Organization for Economic Co-operation and Development (OECD) notes that, South Africa is among a string of countries, that consciously attempt to correct structural imbalances and past economic injustices[ii]. So, the impact on historically disadvantaged individuals (HDIs) was one of the obstacles the merger between the US firm Walmart and the South African firm Massmart, had to overcome in 2011.

So, diversity, inclusivity, and belonging have gained significant traction in recent times. More and more, governments are taking up lead roles in advancing the agenda for diversity. In the United States the Federal government and states further diversity and inclusivity through preferential treatment in procurement, of firms that meet diversity and inclusivity thresholds. Eduardo G. Pereira sums it up this way: People who are in a position to own and manage assets or contribute equity in a “local” company are the well-off and well-educated … thereby again eclipsing the broader population for whose benefit the policies were or should have been designed in the first place[iii].

Given the difficulties in raising capital locally, dominant firms and groups are likely to find it easier to put together a 51% equity stake. Therefore, providing for diversity would ensure that entrepreneurial opportunities in the oil & gas sector are not dominated by entrenched businesses and dominant firms that would move swiftly to establish conglomerates.

An Opportunity to Promote Inclusivity

Local content could also be used to redress spatial disparity in entrepreneurship and wealth. Instead of developing corridors of wealth, it could be used to stimulate entrepreneurship in disadvantaged communities. Firms could be incentivized to set up innovation labs, entrepreneurship incubators and offices or production facilities in non-traditional business zones.

The opening of businesses in disadvantaged communities could spur entrepreneurship and reduce unemployment in these communities. Guyana has an opportunity to focus on content at the level of communities not just in urban centers.

Countries that used local content to develop weak and absent business infrastructure, have seen success. They avoid the resource curse by spreading the business infrastructure across communities, thereby creating wealth and opportunities in multiple communities. Singapore is an example of a country that created geographical and sectoral clusters to hasten the establishment of domestic and/or regional business centers[iv].

The effects of failed local content policies often become evident several years after implementation, by which time, social and economic ills that lead to failed states, have taken deep roots. In Guyana, we started to see two signs emerging simultaneously. The first is the emergence of the seedlings of conflict. Second, businesses have started turning the local content law on its head. If there is an unwillingness to listen and make tweaks along the way, we could soon see the local content law walking on its head.

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. Dr Williams has also earned a Global Masters in Business Administration from Global from TRIUM, an alliance program between New York University, London School of Economics , and HEC Paris. He is also an Adjunct Professor at Zicklin School of Business- Baruch College.

REFERENCES:

[1] Nazim Baluch and Richard Rambarran, [2019], Understanding Local Content Policy in Guyana’s Oil & Gas Sector a Critical Overview, University of Guyana School of Entrepreneurship and Business Innovation Guyana Diaspora and Entrepreneurship Conference, 2019

[1] Eduardo G. Pereira, [2019], Local Content Policies in the Petroleum Industry: Lessons Learned, 4 Oil & Gas, Nat Resources & Energy J 631, 671

[1] South African Competition Act, available at https://www.compcom.co.za/wp-content/uploads/2021/03/Competition-Act-A6.pdf

[1] Organization for Economic Co-operation and Development, [2016], Public Interest Considerations in Merger Control, Working Party No.3 on Co-operation and Enforcement