Local Content Policies” – A Double-Edged Sword!

One of the constant concerns of policymakers and statesmen, particularly in oil and gas exporting countries, is the maximization of the economic benefits derived from oil and gas extraction.

In response to such concerns, the concept of Local Content first emerged in the North Sea oil sector in the 1970s. Today, this concept serves as a benchmark to measure and report the extent to which the economic benefits of extractive industries contribute to the prosperity of other economic sectors.In the author’s view, however, the notion of local content had already taken shape much earlier, simultaneously with the emergence of Offset Agreements.

Offset agreements refer to contracts in which a government (or a governmental entity) undertakes the purchase of certain items or a project with specific technology, on the condition that the exporting country accepts one or more commitments of the following nature: Cooperation with domestic industries of the host country so that certain project components are manufactured locally.

Utilization of domestic contractors of the host country. Transfer of technology to the host country. Investment in connection with the project or another sector within the host country. Export of part of the goods produced from the host country.

Offset agreements were first devised and applied after World War II for military purposes but gradually extended into non-military domains. For example, in Australia, government procurement from foreign companies must necessarily be carried out under offset agreements.

It is evident that the primary objective behind the spread of these agreements was not liquidity or financial incentives, but rather the acquisition of technology and the involvement of domestic contractors and manufacturers.If Local Content Policies (LCPs) are drafted in an overly ambitious manner, they may yield adverse results, harm project progress, or even lead to corruption. While such policies can indeed stimulate economic development, they must not, at the same time, lose sight of economic realities.