Analysis- Part 2: “How we Will Share the Corn?” The Shortcoming of Guyana’s Local Content Law

Last Updated on Sunday, 10 July 2022, 7:38 by Denis Chabrol

by Attorney-at-Law Dr Vivian Williams

You might be wondering why the fight for political power in Guyana is so rancorous, that it took  almost half a year to declare a winner of the 2020 elections. What is brewing is a fight for control  of enormous oil wealth in a winner-take-all system. So, in the heat of the 2020 elections drama, someone asked, “how we will share the corn”? Heightened dissatisfaction with how a country’s  wealth is distributed among its peoples, leads to the resource curse. But a well-thought-out local  content policy could prevent such consequence. 

Local content is not merely about retaining a large chunk of the economic pie from petroleum  production within the host country. If it doesn’t address wealth inequality, a blessing could easily  become a curse. Kolstad & Kinyondoi warn us that the merits of local content are far too often  taken for granted. Yet, in Guyana, local content is marching forward what appears to be little  consideration of potential dark side effects.  

In its evil state, local content could be a bureaucratic mechanism to ensure lopsided distribution  of wealth to politically connected persons and groups. In its more noble form, it ensures that rival political groups are not eating out of the palm of the hands of the political elites. Countries that  invoke the demons of local content, create an economic geography with the filthy rich in gated  communities that meander through abject poverty. When it leads to economic hegemony by an ethnic group in a plural society, local content is a self-destructive ticking time bomb. 

So, this article examines shortcomings of Guyana’s Local Content Act. It considers whether the  Act lends itself to corruption, and exacerbation of ethnic tension.  

Taking a step back to understand Local Content 

Local content became a major feature in petroleum producing countries (PPCs) when  multinational corporations (MNCs) that secured contracts with the government started  disintegrating their supply chain. The shift from a highly vertically integrated structure to  outsourcing, was in pursuit of value chain efficiency. MNCs found the market to be a more  efficient source of the inputs they need to fulfill their contractual obligations. Additionally, they  sought to spread risks, and benefit from specialization and localization.  

For governments, the disintegration of MNCs created a procurement bonanza in the private  sector. Opportunistic politicians view it as an opportunity to expand political patronage beyond  public procurement, into the private sector. So, governments have sought to exercise political  control of this procurement bonanza for good and bad reasons.

Local content seeks to capture within the domestic economy, a chunk of the work that MNCs  outsource. So, it is defined as “the extent to which MNCs procure inputs in the form of goods and  services from the local economy” iii. However, Guyana’s LCR does not measure local content as  the value of actual inputs from the local economy. Instead, it defines local content as “the  monetary value of inputs from the supply of goods, or the provision of services, by Guyanese  nationals or Guyanese companies” iv. I addressed the distinction in a previous article which you  could find here. 

The Illusion of Local Content as a Silver Bullet  

In the early years of local content, petroleum producing developing countries viewed it as a silver  bullet. This silver-bullet fantasy, made protectionist local content policies an easy sell among  locals, hungry for economic opportunities. Protectionist local content policy is one of two  approaches to local content, the other being a liberalized approach v. The protectionist approach  limits the extent of foreign firms’ participation in the domestic petroleum industry and sets rigid  local content targets.  

After decades of implementation of protectionist local content policies, several countries provide  lessons for new regimes. First, businesses get around the rigidity through creative compliance or  outright bribery. The Organization for Economic Co-operation and Development (OECD) found  that as the ‘…technicality and complexity of regulation increases, so does the possibility for less scrupulous players to find loopholes in specific rules and engage in “creative compliance” vi.  

Therefore, a protectionist approach requires an airtight law with a good enforcement  mechanism. Guyana’s local content law falls shorts in this regard. It has a multitude of loopholes  and a weak enforcement structure. RAMPS Logistics is an early case that reveals cracks in the  system. Allegations that have surfaced against RAMPS and utterances from the country’s Vice  President, Bharrat Jagdeo, indicate that creative compliance is already rattling the enforcement  agency.  

The Enforcement Mechanism is Weak  

Guyana’s Local Content Act does not have the enforcement mechanism needed to fulfill its  goals. It sets up a Local Content Secretariat with several deficiencies. Here are some deficiencies  of the enforcement agency: 

1. No Investigative Power Over Domestic Firms  

Though the Act sets out to regulate the extent to which foreign firms have access to  procurement opportunities in the oil and gas sector, it has no power to investigate firms in the  local market. To gain local content certification, a firm self-reports on its ownership and governance structure, and the level of foreign workers participation in its workforce. Once the  information is provided, the Secretariat decides whether to issue a local content certificate. 

The problem is, the Secretariat has no power to investigate the information provided to or  withheld from it. It has no subpoena powers. Further, the Secretariat has no power to seize and  inspect documents and computers and electronic files from firms suspected of creative  compliance or outright fraud. It cannot summon and depose witnesses with potentially useful  information and conduct hearings. Where the Act speaks of investigation and monitoring, it  specifically restricts the jurisdiction of the Secretariat to oil companies that have contracts with  the government.  

Self-reporting and the absence of a robust investigative power, give domestic firms and foreign  firms seeking to enter the market, an incentive to cheat. So, it is not surprising that creative  compliance is already becoming a major problem. With the law as it is, things are expected to get  worse not better. 

2. There are no Checks and Balances  

The Secretariat has a single Director rather than several Directors. A single director increases the  prospect for corruption and corruptibility. This is particularly so because there is no  administrative review process to create a check on the Director. To reduce the chances for  corruptibility, enforcement agencies in the corporate arena avoid a structure where a single  person or group handles a case from intake to decision.  

3. Lacks Due Process  

Due process is gaining increasing prominence in competition law enforcement. As Yoo, Jiang, &  Huang (2021) put it, “adherence to basic principles of due process has long been recognized as an  essential aspect of proper competition law enforcement” vii. Multilateral organizations such as the  OECD and International Competition Network (ICN) have contributed significantly to a global  consensus on due process in competition review. The key institutional features that ensure due  process rights are: 

1. Right to confront the evidence 
2. Hearing before the actual decision-maker 
3. A neutral decision-maker 
4. Judicial review of decision; and 
5. Rendering of decisions without inordinate delay. 

So, there are ex-ante and ex-post elements in the process. Ex-ante processes provide firms with  an opportunity to contest a likely adverse decision. For example, a firm is provided the likely  basis for a denial and a specified time to respond before a negative decision is formalized. Ex post remedies provide steps for administrative and judicial review after the decision is made.  

It is therefore shocking that Guyana’s Attorney General, Anil Nandlall, describes the lack of due  process mechanism in the Local Content Act as a conscious omission. This is how he explains it:

The intent was to avoid administrative bureaucracy as far as possible, full well  recognizing that a genuine challenge will eventually wind its way into the  judiciary… any person who is adversely affected by an administrative act or  omission of anybody which affects public law rights, obligations or  expectations may apply to the court for judicial review. 

Out of Step with Global Consensus on Due Process in Corporate Matters  

So, according to the AG, ex-ante due process is a casualty of bureaucratic trimming. This position  is not informed by the reality of corporate transactions and competition review. When a merger,  acquisition, joint venture or in this case, local content certification is denied, the injury to a firm  is not remedied by a subsequent ruling of a court. What the denial does is cut the firm off from business opportunities or a specific contract. Injury to a firm could translate to injury to  competition. 

At the end of lengthy litigation, even if the firm wins, the business opportunity is not sitting  around waiting. A court decision cannot turn back the clock 18 or 24 months to restore the ex ante status quo. Very often, the firm may be forced out of the market during the pendency of  the litigation. It is this factual nature of commerce that secured global consensus on the  importance of ex-ante due process. 

Moreover, as the Former Chairwoman of the Federal Trade Commission in the US (FTC) Edith  Ramirez noted,  

Strong procedural guarantees not only ensure fairness to parties but also  provide substantial benefits to agencies, including allowing them to efficiently  reach duly informed decisions and maintain credibility with stakeholders. viii 

Subject to Political Control and Direction  

To avoid dark side effects of local content, the law or policy must be carefully drafted, and the  enforcement mechanism carefully constructed. Guyana has created a toothless poodle as its enforcement agency. It has weaknesses that studies of other countries found contribute to  corruption, linkage patronage, economic hegemony of groups associated with the controllers of  political power, and seething anger of those who are left out and left behind. These are the  ingredients of the resource curse.  

Further, subjecting the Local Content Secretariat to political control is a grave error. The  Secretariat is a unit within a government Ministry. More importantly, the Minister has  supervisory control. The Act states that  

The Minister may give policy orders and general directions to the Secretariat  in relation to the exercise of the functions of the Secretariat.

Autonomy and independence are needed for effective enforcement of private enterprises,  particularly in areas that impact competition. Countries that deviate from this model have been  plagued by corruption, anticompetitive effects, and marginalization of political opponents.  

The Secretariat would better avoid the taint and animosity from charges of political control and  victimization if it were nested within the Competition and Consumers Affairs Commission. It would  benefit from the more robust investigative and adjudicative processes of that Commission.  Further, there would be more consistency in the work of the two agencies which should have the  mutual goal of increasing competition within domestic markets.  

It should not be overlooked that properly implemented local content could calm the political  storm. However, if badly implemented it could inflame tension. Hansen and others warn: 

The politics of local content may on the one hand predestine local content  policies to fail or become in-efficient. But on the other hand, alignment with  the political realities may also be a precondition for successful local content ix.  

Afterall, there is that question – “How we will share the corn?” 

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. 

Works cited

i Ivar Kolstad & Abel Kinyondoo (2017) Alternatives to Local Content Requirements in Resource-Rich Countries,  Oxford Development Studies, 45:4, 409-423 

ii Michael W. Hansen, Lars Burr, Anne Mette Kjaer and Ole Therkildsen (2016); The Economics and Politics of Local  Content in African Extractives: Lessons from Tanzania, Uganda and Mozambique, Forum for Development Studies,  Vol. 43, No. 2, 201-228 

iii See note ii. 

iv Local Content Act, 2021 

v Pereowei Subai (2019), Local Content Oil and Gas Law in Africa: Lessons from Nigeria and Beyond, Abingdon,  Routledge Research in Energy Law and Regulation 

vi OECD, Reducing the Risk of Policy Failure: Challenge for Regulatory Compliance, (2000),  https://www.oecd.org/gov/regulatory-policy/46466287.pdf 

vii Christopher S. Yoo, Thomas Fetzer, Shan Jiang, & Yong Huang, (2021) Due Process in Antitrust Enforcement:  Normative and Comparative Perspectives, 94 S. Cal. L. Rev. 843 

viii Edith Ramirez, Chairwoman, U.S. Federal Trade Commission, Core Competition Agency Principles: Lessons  Learned at the FTC, Keynote Address Before the ABA Antitrust in Asia Conference (May 22, 2014) ix Michael W. Hansen, Lars Burr, Anne Mette Kjaer and Ole Therkildsen (2016); The Economics and Politics of Local  Content in African Extractives: Lessons from Tanzania, Uganda and Mozambique, Forum for Development Studies,  Vol. 43, No. 2, 201-228