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Unpacking Local Content Requirements in the Extractive Sector: What Implications for the Global Trade and Investment Frameworks?

September 2016

DOI:10.13140/RG.2.1.4943.5129

Affiliation: E15 Initiative

Authors:

Isabelle Ramdoo

African Minerals Development Centre

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The 15Initiative

STRENGTHENING THE GLOBAL TRADE AND INVESTMENT SYSTEM

FOR SUSTAINABLE DEVELOPMENT

E15 Expert Group on

Trade and Investment in Extractive Industries

Think Piece

Unpacking Local Content Requirements in the

Extractive Sector: What Implications for the Global

Trade and Investment Frameworks?

Isabelle Ramdoo

September 2015

Co-convened with

ACKNOWLEDGMENTS

Published by

International Centre for Trade and Sustainable Development (ICTSD)

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Tel: +41 22 917 8492 – E-mail: ictsd@ictsd.ch – Website: www.ictsd.org

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World Economic Forum

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Co-Publisher and Managing Director: Richard Samans

Acknowledgments

This paper has been produced under the E15Initiative (E15). Implemented jointly by the International Centre for Trade and Sustainable

Development (ICTSD) and the World Economic Forum, the E15 convenes world-class experts and institutions to generate strategic

analysis and recommendations for government, business, and civil society geared towards strengthening the global trade and

investment system for sustainable development.

For more information on the E15, please visit www.e15initiative.org/

The Expert Group on Trade and Investment in Extractive Industries is co-convened with the International Institute for Sustainable

Development (IISD). http://www.iisd.org/

With the support of:

Citation: Ramdoo, Isabelle. Unpacking Local Content Requirements in the Extractive Sector: What Implications for the Global Trade

and Investment Frameworks? E15Initiative. Geneva: International Centre for Trade and Sustainable Development (ICTSD) and World

Economic Forum, 2015. www.e15initiative.org/

The views expressed in this publication are those of the author and do not necessarily reﬂect the views of ICTSD, World Economic Forum,

or the funding institutions.

purposes, provided the source is acknowledged. This work is licensed under the Creative Commons Attribution-Non-commercial-No-

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ISSN 2313-3805

And ICTSD’s Core and Thematic Donors:

Developing countries are placing an increasing emphasis on the need to derive more beneﬁts from their resource wealth. To do so,

a series of reforms have been undertaken to capture more gains from extractive resources. These include, among others, industrial

policies to foster better sourcing of local content and job creation, ﬁscal reforms, and more collaborative partnerships with the

extractive industry. This paper focuses on the question of local content in the oil, gas, and mining sectors, particularly the policies

put in place to foster its use, and how this ﬁts into the international trade and investment frameworks. It initially unpacks the

deﬁnition and the scope of local content and the different levels of regulatory requirements used to address the question. It then

presents evidence of what has worked (or not) in different contexts and under different conditions, before turning to the global

frameworks governing local content requirements (LCRs). It goes on to make some recommendations on how international

regulatory frameworks could be improved to ﬁt the needs of countries and companies, and for a more equitable distribution of

wealth.

Existing rules regarding some forms of LCRs, as deﬁned in World Trade Organization (WTO) agreements, are quite clear—they are

prohibited, disciplined, or allowed. When these measures were found insufﬁcient to address the concerns of investors, countries

concluded tighter agreements, in the form of bilateral investment treaties (BITs)/ international investment agreements (IIAs) or

preferential trade agreements (PTAs), making LCRs almost impossible to put in place. Yet, this has not prevented the proliferation

of new measures. It points to that there are signiﬁcant weaknesses with the way rules are currently deﬁned and enforced. The ﬁrst

weakness to be addressed regards the deﬁnition of LCRs, which is still subject to wide interpretation. Second, while changing WTO

rules might take time, it is important to consolidate the role the organisation can play, in particular to reﬂect on ways to have

a more coherent approach, given the multiple bilateral trade and investment agreements signed by its Members. Third, no cases

have been brought so far at the WTO Dispute Settlement Body (DSB) on extractives-related LCRs, while BITs and IIAs disputes

have extensively focused on the extractive sector. The main challenge is that there is a lack of transparency in arbitral rulings and

proceedings that take place under the bilateral dispute mechanisms.

While transparency is necessary, it is not sufﬁcient in itself. Therefore, countries should have space to engage and discuss these

issues at a dedicated platform. Participation in this platform should be broadened to regional economic communities (RECs),

which have their own experiences on setting guidelines on these issues, and also to other stakeholders, such as other international

organizations or representatives of the private sector. LCRs are largely an investment issue and therefore require an investment

policy solution. Yet, the continued relevance of the WTO amid the evolving trade and investment system will be conditional on

its capacity to adapt to reﬂect the new realities. One way to address this is to design a variable geometry approach, while ensuring

that the concerns of developing countries are addressed. This means allowing space for some countries desiring to move faster

on certain issues the ability to do so, keeping the door open for others to join at a later stage, and allowing all others to observe.

It is therefore proposed to adopt a carefully designed plurilateral framework on investment, with a set of protocols and rules of

operation to guide such negotiations, which will then be agreed to by all Members of the WTO. Alternatively, RECs can play a key

role in seeking to establish better rules, essentially for two reasons. Due to their localised mandate, they have a tendency to focus

on areas of common interests to their members, such as building regional markets that reﬂect the speciﬁcities of their respective

regions and designing rules that ﬁt the development levels of their member countries. While these may create some challenges for

the multilateral system, they may also provide a platform to engage on improving the rules using a sequenced approach.

Finally, an improved regulatory environment is conditional upon policy coherence and coordination across international initiatives,

whose objectives are to improve the governance of the extractive sector. Numerous initiatives and institutions have been

established to address speciﬁc issues or to achieve mutual goals. For instance, the Extractive Industries Transparency Initiative (EITI)

aims at improving transparency and accountability in the extractives sector. Although not all countries are members of the EITI, this

is an important element in the governance of the sector.

ABSTRACT

CONTENTS

Introduction

Local Content Requirements in Extractive Sector: Deﬁning the Scope

Deﬁnition and Coverage

Taxonomy of Local Content Requirements

Local Content Requirements in Practice

Countries’ Experiences in Using LCRs

Key Lessons from LCR Experiences

Regulatory Frameworks Governing LCRs

Relevant Provisions on LCRs in Trade and Investment Agreements

Relevant Disciplines In WTO Agreements

Developing Countries: Special and Differential Treatment and Policy Space

Looking Forward: Regulate More or Regulate Better?

Making the System Clearer: Enhancing Transparency, Predictability and Flexibility

Alternative Policies To LCRs: Promoting Regional Content

Policy Coordination: What Role For The Private Sector?

Policy Coherence And Effectiveness Across Initiatives

References

Annex 1

iii

AMDC Africa Mineral Development Centre

AMV Africa Mining Vision

ASCM Agreement on Subsidies and Countervailing

Measures

BITs bilateral investment treaties

CETA Canada-EU Trade Agreement

DSB Dispute Settlement Body

EITI Extractive Industries Transparency Initiative

EU European Union

FDI foreign direct investment

FTA free trade agreement

GATS General Agreement on Trade in Services

GATT General Agreement on Tariffs and Trade

GPA Agreement on Government Procurement

ICMM International Council on Mining and Metals

ICSID International Centre for Settlement of

Investment Disputes

IFC International Finance Corporation

IIAs international investment agreements

LCA Local Content Act

ITA Information Technology Agreement

LCRs local content requirements

LDCs least developed countries

MFN most-favoured nation

NAFTA North American Free Trade Agreement

OECD Organisation for Economic Co-operation

and Development

PCA Permanent Court of Arbitration

PTAs preferential trade agreements

R&D research and development

RECs regional economic communities

RoO rules of origin

SCC Stockholm Chamber of Commerce

SDT special and differential treatment

SMEs small and medium-sized enterprises

SOEs state-owned enterprises

TRIMs Trade-Related Investment Measures

TRIPS Trade-Related Aspects of Intellectual

Property Rights

UNICITRAL United Nations Commission on International

Trade Law

US United States

WTO World Trade Organization

Table 1: Taxonomy of Local Content Requirements

and Application in Selected Countries

Table 2: Examples of TRIMs-related Measures related

to the Extractive Sector

Table 3: Selected Countries’ Measures on LCRs and

Potential Relationship with WTO Provisions

Table A: Levels of LCR Regulations in Selected

Mineral-rich Countries

Table B: Relevant Regulatory Frameworks on LCRs in

Selected Mineral-rich Countries

Table C: Matching LCRs with Relevant WTO

Provisions

LIST OF ABBREVIATIONS LIST OF TABLES

LCRs are policy tools used by governments to generate

economic beneﬁts for the local economy, beyond ﬁscal

beneﬁts. It is not conﬁned only to the extractive sector,

and has been, and is still being, widely used, irrespective of

countries’ income levels.

In resource-based developing economies, there is an

increasing tendency to use LCRs as a stimulus to combine

the use of locally extracted raw materials with domestically

available factors of production (such as labour, locally

sourced goods and services, and so on) to create more value

in the economy. The rationale behind the use of LCRs is

driven by the urge to address common key challenges—(i)

the over-reliance on natural resources with respect to their

contributions to national income, foreign exchange, and

exports; (ii) the paradox of plenty, that is, the unacceptably

high prevalence of poverty and inequality amid an

abundance of resource riches (Karl 1997); (iii) to mitigate and

manage social and political risks due to rising expectations

domestically for a better and more equitable distribution of

wealth; and (iv) the need to create more job opportunities,

given the capital-intensiveness of the extractive sector.

The increasing use of LCRs reﬂects the changing focus in

the policy debate regarding the way in which the extractive

sector has traditionally contributed (or not) to a country’s

development. It, however, calls for ﬁnding an economic and

political balance in seeking to increase the beneﬁts derived

from the extractive sector, while maintaining incentives for

investment and the competitiveness of the sector.

While there is little disagreement over the reasons why

countries chose to encourage the use of local content, there

is no agreed deﬁnition of what “local” actually covers, nor

is there a full consensus on what “content” should be. It is

therefore necessary to unpack the concept. As countries’

experiences suggest, policy implications are likely to be

different, depending on how the scope and depth of the

concept is deﬁned.

This paper makes an important distinction between, on

the one hand, local content needed to stimulate forward

linkages, through the use of locally available raw materials

for enhanced value addition, resource-based industrialisation,

LOCAL CONTENT

REQUIREMENTS IN

EXTRACTIVE SECTOR:

DEFINING THE SCOPE

Many resource-rich developing economies have not beneﬁted

satisfactorily from the wealth created by their extractive

resources. For instance, in the mining sector, it is estimated

that while on an average mining foreign direct investment

(FDI) accounts for 60 to 90 percent of total FDI, the sector

only contributes to between 3 and 20 percent of government

revenue, 3 and 10 percent of national income, and only 1 to

2 percent employment in low- and middle-income countries

(ICMM 2014). For this reason, developing countries are placing

an increasing emphasis on the need to derive more beneﬁts

from their resource wealth. To do so, a series of reforms

have been undertaken to capture more gains from extractive

resources. These include, among others, industrial policies

to foster better sourcing of local content and job creation,

ﬁscal reforms, and more collaborative partnerships with the

extractive industry.

This paper focuses on the question of local content in the oil,

gas, and mining sectors, particularly the policies put in place to

foster its use, and how this ﬁts into the international trade and

investment frameworks. The paper is structured in four parts.

Section 1 unpacks the deﬁnition and the scope of local content

and the different levels of regulatory requirements used to

address the question. Section 2 illustrates, using country case

studies, evidence of what has worked (or not) in different

contexts and under different conditions. Section 3 looks at

the global frameworks governing local content requirements

(LCRs). Finally, Section 4 makes some recommendations on

how international regulatory frameworks could be improved

to ﬁt the needs of countries and companies, and for a more

equitable distribution of wealth.

INTRODUCTION

and economic diversiﬁcation, and on the other hand,

local content used in the expansion of backward linkages,

notably through the use of certain factors of production

available domestically as inputs for the extractive industry,

essentially to encourage the development of local supply

chain providers. The rest of the paper focuses primarily on

the latter.

DEFINITION AND COVERAGE

As mentioned, there is no universal deﬁnition of what

constitutes “local content.”1 It is a multi-dimensional

concept whose scope and depth vary substantially. In the

extractives context, local content has an intrinsic spatial

dimension that needs to be underscored.2 Narrowly

deﬁned, it is viewed as value created around the region

that immediately surrounds the extractive sector. In Ghana,

Newmont gives more priority to “local local” companies,

that is, those businesses situated in the vicinity of mining

operations. More broadly deﬁned, it involves the recognition

of the “nationality” of capital or location of companies’

headquarters. Companies may therefore be considered as

local if (a) they are locally based and locally owned; (b)

locally based but foreign owned; or (c) locally owned but

foreign based. The following criteria are frequently used in

various deﬁnitions of LCR.

(i) Ownership, notably requiring foreign ﬁrms to

enter into joint ventures with local ﬁrms or to open

equity to local partners to obtain licences. The aim

is to ensure that sectors of national interests are not

entirely foreign owned or to help the development

of “national champions” through transfer of skills,

know-how, or technology. In Norway, ownership of

a company is not a determining factor. Brazil now

accepts foreign ownership, but prefers partnerships,

while Nigeria, Angola, Ghana, and Uganda consider

local ownership as determinant.

(ii) Maximisation of local procurement and preferences

given to sourcing from local companies, as an

opportunity to localise supply chains where varying

technologies and inputs are needed and used. If

competitive, this may have considerable impact on

reducing companies’ operating costs while at the same

time increasing the value that can be captured by local

businesses. The International Finance Corporation (IFC;

2011) suggests different criteria for the deﬁnition of

“local”, including the size of local companies involved

in the supply chain.3

(iii) A percentage of raw materials to be further

transformed or beneﬁciated locally, notably through

forward linkages. Countries such as Australia,

Mongolia, Brazil, Nigeria, Zambia, and more recently

South Africa have strong policies in this regard

(beyond the scope of this paper).

The World Bank (2012) deﬁnition for “domes tic preference qualiﬁcation”

is based on the percentage of local ownership of the ﬁrm. The African

Development Bank (AfDB) deﬁnes “local ﬁrms” based on place of

registration, a majority of board members being nationals, and level of

shares held by nationals.

Essentially for two reasons: (i) the nature of the industry causes the

concentration of mineral extraction in a particular location; (ii) the

distribution of socio-economic beneﬁts (such as the concentration of

clusters) tends to be closely linked to the geographical location of mines.

For a good overview of different criteria for deﬁning “local,” see IFC (2011).

Policy frameworks include guiding principles, national development plans,

policy statements, country vision documents, and the like and set the broad

orientation that governments want to take in governing the extractive

sector.

For a thorough review of different types of local content policies, see Tordo

et al. (2013).

(iv) Local employment at different stages of the value

chain and of different levels of competencies. This

is often accompanied by requirements to enhance

local capabilities of employees and suppliers, through

training, skills and expertise development, and transfer

of know-how and technology.

(v) Requirements to bring some level of technology

or perform research and development (R&D) in the

country so that companies can perform competitively

by using latest state-of-the-art technology, or for local

companies to beneﬁt from technology transfer.

TAXONOMY OF LOCAL CONTENT

REQUIREMENTS

LCRs are generally articulated in policy frameworks or

codiﬁed in their related regulatory instruments.4 As

Table 1 shows, these can be classiﬁed in two categories.

First, policies that impose quantitative requirements on

companies in the form of legally binding targets, generally

in terms of volume (for example, number of local staff to

be employed or number of contracts to be awarded to local

suppliers) or value (that is, a percentage of spending on

local procurement). They are found in legislations, contracts,

licensing agreements, conditions for tender qualiﬁcations,5

and so on and may be binding on companies, pending

penalties. Second, policies that are based on qualitative

requirements such as transfer of technology or training of

staff. These are generally found in policy tools, legislations,

and contractual agreements and are less constraining. They

may contain loosely deﬁned targets, which are non-binding.

It is estimated that more than 90 percent of resource-rich

countries have one form of LCR or another, 50 percent of

which are of a quantitative nature (McKinsey 2013). Table

A in Annex 1 summarises the types and strength of LCR

regulations in place in selected resource-rich countries.

To stimulate the implementation of LCRs, governments

may also offer other types of incentives to companies.

Horizontal complementary incentives are frequently

provided such as tariff exemptions on imports of equipment,

ﬁscal exemptions in support of the development of local

industries, or other measures to provide an enabling

environment for local businesses to prosper and address

constraints such as infrastructure deﬁcits, stiff business

climate, access to ﬁnance, or skills and capabilities shortages.

Additionally, sector-speciﬁc industrial policies may be

put in place to tackle key market failures that inhibit the

overall development of the local economy.6 In low-income

countries, for instance, where there are few buyers (large

mining companies) and not enough suppliers (due to weak

local enterprises), policies may target identiﬁed parts of the

supply chain.

Resource-rich countries all have a mix of quantitative and

qualitative requirements, the balance being determined

by the policy orientation of the government, the levels

of development of the countries, and their capacity to

implement and monitor these measures. Oil and gas

companies tend to be subject to a higher level of quantitative

regulations than mining industries, mainly as a result of the

way in which contracts are deﬁned. Countries generally

tend to relax stringent numerical obligations as they move

to higher levels of income, as their mineral sectors get

more integrated in the global economy, or as their national

suppliers become more competitive.

Source: Adapted from Jojarth (2015).

These may take the form of market failures associated with exports and FDI

(use of subsidies and tax breaks); coordination failures at the level of speciﬁc

sectors (use of competitiveness strategies); asymmetry of information;

insufﬁcient local capacity in R&D and innovation (support to innovation

incubators), and so on.

Types of

policies

Type of

measures Examples of measures Examples of countries applying such measures

Quantitative

requirements

Quotas based on

numbers

Number of local population

employed

Angola: At least 70 percent work force to be Angolan

nationals.

Nigeria: Companies are required to employ only Nigerians in

junior and intermediate positions.7

Kazakhstan: 95 percent minimum requirement for

employment of nationals.

Certain categories of

procurement reserved for locals

Angola: For logistics and catering.

South Africa: Procurement targets around black economic

empowerment, for example, 40 percent on local procurement

expenditure, 50 percent on local consumable goods, and 70

percent on local services.

Nigeria: Exclusive consideration (that is, 100 percent) to

Nigerian indigenous service companies,8 provided local

company has capacity to execute.

Speciﬁc content target for

certain products

Nigeria: The Local Content Act (LCA) provides for categories

of activities (for example, ﬂoating products; storage and

ofﬂoading vessels; steel plates) to be locally procured. LCR

targets for some goods and services set between 80 percent

and 100 percent.9 Companies may be subject to penalties

for non-compliance, such as cancellation of projects and ﬁne

equivalent to 5 percent of project value.10

Quotas based on

values

Technological transfer Norway: Requirement to conduct at least 50 percent of

research for technology in partnership with local institutions.

Percentage of local

procurement spending going to

local companies

Indonesia: Companies to procure locally at least 35 percent of

services for contracts > US$100,000

Local suppliers to beneﬁt from

percentage preferential price

Kazakhstan: Procuring entities to reduce price of bids by 20

percent for local suppliers.

State participation to obtain

licenses

Brazil: Target set at 50 percent for onshore projects; 51

percent for offshore in shallow water; 37 percent for deep

water projects.

TABLE 1:

Taxonomy of Local Content Requirements and Application in

Selected Countries

These may take the form of market failures associated with exports and FDI

(use of subsidies and tax breaks); coordination failures at the level of speciﬁc

sectors (use of competitiveness strategies); asymmetry of information;

insufﬁcient local capacity in R&D and innovation (support to innovation

incubators), and so on.

Meaning Nigerian based, which can demons trate ownership of equipment,

and employing Nigerian personnel.

Schedule A of the Nigerian Content Development Act speciﬁes the level of

Nigerian Content to be achieved per activity or input used by operators in

the oil and gas sector. For goods and services such as steel pipes and plates,

cables, valves, cement, audit services and geographical survey services, the

local content requirement is 100 percent (G/TRIMS/W/142).

See G/TRIMS/W/89.

Types of

policies

Type of

measures Examples of measures Examples of countries applying such measures

Qualitative

requirements

Reporting and

justiﬁcation

Companies must report and

justify hiring foreign labour or

sourcing inputs from abroad

Angola: Oil companies must submit an “Angolanisation” plan

to the ministry of petroleum annually, detailing how they

plan to achieve their targets.

Zambia: Companies to submit plan, with indications of

estimated staff requirements (local and expatriates), training,

and creation of a local business development programme.

South Africa: Companies to report annually through

a scorecard local content, employment, and company

ownership to historically disadvantaged groups.

Nigeria: LCA require investor to submit annual knowledge

transfer plans; companies to submit an “employment

succession plan” on how to “Nigerianise” such positions

within a four-year period.

Information

sharing

Companies must advertise

vacancies or publish tenders

and procurement opportunities

Brazil: Database set up to facilitate business linkages.

Chile: Information sharing, suppliers’ registration and

certiﬁcation.

Capability and

knowledge

development

Companies to train local

staff or train and certify local

suppliers

Norway: Upgrading capabilities of local services suppliers and

industrial clusters.

Brazil and Chile: Creation of suppliers development

programme for small and medium-sized enterprises (SMEs);

partnership with foreign ﬁrms to promote local suppliers.

Mozambique: Development of local know-how required,

through employment and technical training, with preference

for populations living around mines.

R&D contribution

and transfer of

technology

Companies commit to transfer

technology to local ﬁrms

Companies required to carry

out some levels of R&D

Brazil: Licensing determined by R&D contribution and

technological transfer; partnership with foreign ﬁrms to foster

technological transfer.

Norway: Partnership with multinationals to transfer

technology, acquire skills, and conduct R&D.

Preferential

treatment

Companies must hire local

staff or source inputs locally if

available on a competitive basis

Mozambique (petroleum), Brazil, Norway: Require operator

to give preference to local suppliers only if competitive on the

basis of quality, price, and availability.

Zambia: Maximum preferences sought for local entrepreneurs,

no targets ﬁxed.

Nigeria: Preference for local suppliers in tendering process, if

they have capacity and provided value of bids < 10 percent

of lowest bidder. Some speciﬁc manufacturing processes

such as welding and fabrication should take place in Nigeria

(equivalent to prohibiting imports of fabricated products).

The so-called Carwash scandal—in which some of Brazil’s largest

contractors and oil suppliers are currently facing allegations that they

formed a cartel and paid kickbacks to Petrobras executives and politicians—

has brought to light the downsid e of an excessive dependence on local

industries, as this encouraged collusive behaviour.

It is difﬁcult to make an overall assessment of the impact

of LCRs in resource-rich countries, in part due to lack of

empirical evidence but also because experiences vary

signiﬁcantly across countries. For instance, despite extensive

use of LCRs, many resource-rich countries continue to attract

signiﬁcant levels of FDI (Nikièma 2014), although there are

many cases where measures have failed to achieve their

stated objectives due to a lack of capacity to implement,

manage, and monitor LCRs.

COUNTRIES’ EXPERIENCES IN USING LCRS

Countries that have been successful in using LCRs have all

used a combination of quantitative and qualitative measures,

based on their capacity to deliver, while ensuring a fair

balance between their economic objectives and the viability

of investments. Table 1 provides an illustration of measures

taken by a number of countries. Norway, for instance,

enacted regulations that had clear targets and sunset clauses

for quantitative regulations. Initially, foreign companies were

required to give preferences to local ﬁrms, provided the latter

were competitive on the basis of price, quality, and delivery.

This measure was temporary, based on performance and

was later relaxed. It led to the creation a national champion,

Statoil, and world-class global suppliers. Today, the domestic

supply chain provides between 50 to 60 percent of capital

inputs, 80 percent of operational and maintenance inputs,

and exports 46 percent of its sales (Word Bank 2012).

Quantitative LCRs have been mainly used to foster local

procurement, employment of local staff, technology transfer,

or set up joint ventures. In Brazil, use of local content was

a key criterion for the award of petroleum rights (Cosbey

2015). Due to supportive measures by the government to

drive the development of local capacity and the key role of

the national champion, Petrobras, commitments to local

content increased from 25 percent to 80 percent in a decade

(Sigam and Garcia: 2012). The corruption scandal that

shook Petrobras in 2015, including on the implementation

of its LCRs,11 is expected to see a major overhaul towards

liberalization of policies governing the procurement of

equipment and services domestically. In Nigeria, in contrast,

despite strict quantitative targets for employment and local

sourcing, satisfactory results in practice have taken time to

materialise due to the insufﬁcient capacity of local suppliers

LOCAL CONTENT

REQUIREMENTS IN

PRACTICE

to meet targets or the unavailability of sufﬁcient skills to be

absorbed by the industry. A number of Nigerian companies

have, however, started to internationalise themselves and

are now operating in other African countries. But given the

potential of Nigeria, this remains largely insufﬁcient.

While quantitative LCRs may work, they are in themselves

not sufﬁcient to stimulate the development of local

suppliers, employment of local staff, transfer of technology,

or creation of national champions. They need to be

accompanied by other policies. For instance, Norway also

privileged capability and knowledge development, supported

by public investment in R&D and developed strategic

collaborative partnerships with foreign companies to develop

technology and acquire skills. Similarly, Malaysia and Chile

simultaneously established strong partnerships with foreign

ﬁrms, while at the same time supporting local suppliers (and

small and medium-sized enterprises [SMEs] in the case of

Brazil) by identifying gaps and facilitating their interaction

with foreign ﬁrms. In Brazil, oil and gas ﬁeld operators

are required to pay 1 percent of their gross revenue to the

government, which is then invested in R&D schemes in the

country.

Others have opted to ﬁnance skills development and training

by seeking ﬁnancial contributions from foreign companies or

by putting aside a share of royalties. In Nigeria, 1 percent of

the total value of contracts awarded in the upstream sector

goes to a Content Development Fund (KPMG 2010) to

support training and business support services. South Africa

and Malaysia have established skills development funds

where extractive industries have an obligation to contribute.

In Brazil, a share of royalties goes to the Oil and Gas Sectoral

Fund to support specialised training and capacity building

(Cosbey 2015).

Initiatives led by foreign companies, development agencies

(such as the IFC), and chambers of commerce are an essential

element in the success of LCRs. For instance, a world-class

supplier programme was set up in Chile by BHP Billiton to

stimulate the emergence of reliable and competitive local

suppliers and build a knowledge-based mining sector. This

programme was distinctive on several fronts. The company

identiﬁed and presented an operational challenge to

suppliers instead of simply requesting existing, standardised

solutions. This created a demand for innovation, which

built a better alignment with market needs and improved

the use of resources, and therefore created a secured and

tailor-made market for suppliers. In Ghana, inspired by its

experience in Peru, Newmont, in partnership with the IFC and

the Chamber of Mines, developed a programme to support

the development of local businesses to supply goods and

The TRIMs Agreement clariﬁes existing rules contained in Articles III

(National Treatment) and XI (Prohibition on Quantitative Restrictions) of

the GATT, 1994.

By their nature, LCRs emphasise preferential treatments for

local suppliers vis-à-vis foreign goods and services providers

and are therefore viewed by many as protectionist measures

(Hufbauer et al. 2013). From a development perspective,

they can be a tool to achieve certain economic and non-

economic goals such as developing local supply chains,

expertise, ensuring technological transfer, or achieving better

social outcomes. From an international trade perspective,

countries, however, need to be prudent to ensure that their

measures do not contravene commitments at the bilateral

or multilateral level. The fact that there is no agreed

deﬁnition of LCRs and that their scope is very broad suggests

that measures are likely to be subject to a wide range of

disciplines.

RELEVANT PROVISIONS ON LCRS IN TRADE

AND INVESTMENT AGREEMENTS

In the multilateral trading system under the World Trade

Organization (WTO), the most relevant agreements on

compliance of LCRs are the General Agreement on Tariffs

and Trade (GATT), the Agreement on Trade-Related

Investment Measures (TRIMs),12 the General Agreement

REGULATORY

FRAMEWORKS

GOVERNING LCRS

services, and upscale the capacity of business associations

to provide sustainable business support, training, and

other services to the local business community. This multi-

stakeholder programme led to the creation of an ecosystem

of business opportunities around the mining area, including

in non-mining activities, such as agriculture. In South Africa,

Anglo American launched a Small Business Initiative to

provide business opportunities for SMEs, in particular for

historically disadvantaged populations. Mozambique also

has a good track record of collaborative partnerships with

the private sector to scale up business linkage programmes.

For instance, the Mozal aluminium smelter was designed and

implemented in partnership with a range of stakeholders

to stimulate and strengthen local business capacities and

enable small enterprises to compete for contracts at different

stages, from construction to ongoing operation.

KEY LESSONS FROM LCR EXPERIENCES

A few lessons can be drawn from the experiences of countries

that have implemented LCRs. First, policymakers need

to ensure that the objectives of LCRs are clear and that

they are implemented and monitored in a way that they

create fully capable and competitive local suppliers and not

become obstacles to the development and competiveness of

industries. When local content policies were well deﬁned and

monitored in a pragmatic manner, as was the case in Norway,

Chile or Brazil (including quantitative measures), they were

found to be more successful.

Second, while mandatory quantitative requirements can

work, quotas should not be ﬁxed at a level that local

suppliers are not able to deliver. In addition, they should be

temporary, performance-based, and should be phased out

as industries become competitive. Functioning and effective

LCRs require a holistic approach to industrial policy. This

implies that LCRs need to be accompanied by support to

build the capacity of suppliers, and address skills gaps or

ﬁnancial constraints, as in the case of SMEs. Partnerships

with the private sector are equally key to develop capacity.

Third, LCR ambitions need to be realistic and implementable

by the extractive sector. They must be ﬂexible enough to be

able to adapt to changing situations. Norway phased out

certain performance-based requirements as its industries

became globally competitive. They need to be able to

assume some potentially politically difﬁcult trade-offs. For

example, Petrobas in Brazil skimmed 20,000 jobs (one-third

of its headcount) during the restructuring process in 1997 but

gained in efﬁciency and sophistication (WTI 2013).

Fourth, successful experiences suggest that it is important

to ensure a balance between quantitative and qualitative

measures based on how far those measures can be monitored

or implemented. For example, a legally binding quota for

technology transfer may be difﬁcult to monitor because it

may not be possible for governments to identify, in the ﬁrst

place, which technology companies should use (Cosbey

2015). In the case of joint venture requirements, unless

there is a business case to do so, there is a risk of creating a

“forced marriage” that will fail if there is no trust, no shared

objective, and no complementarity (Cosbey and Mann

2014). Countries were most successful when local content

development was conducted through strategic collaborative

partnerships with companies.

Finally, the importance of innovation, R&D, upgrading

capabilities, and technology transfer should not be

underestimated. These are essential complementary policies

to build competitive local suppliers and efﬁcient providers.

on Trade in Services (GATS), the Agreement on Subsidies

and Countervailing Measures (ASCM), and the Agreement

on Government Procurement (GPA). While the GATT, the

TRIMs, and the GATS apply to all WTO Members, the GPA

is a plurilateral agreement, which binds only its 43 signatory

members.13 However, in many cases, LCRs are not only

trade related, but essentially investment related. Therefore,

international and bilateral investment agreements also

largely regulate the extent to which signatory countries can

use (or not) certain measures to oblige foreigners to use

more local content. This section summarises the various legal

provisions contained in trade and investment agreements

that could potentially impact the legality of the use of LCRs.

RELEVANT DISCIPLINES IN WTO AGREEMENTS

The national treatment requirement, as provided for in

Article III of the GATT, establishes a strong legal basis

regarding the treatment accorded to local goods providers

compared to foreign producers. The consistency of LCRs

will, therefore, be deﬁned according to the provisions of

Article III:4. In addition, Article III:5 of the GATT prohibits

quantitative regulations pertaining to the “processing or

use of products in speciﬁed amounts or proportions which

requires, directly or indirectly, that any speciﬁed amount

or proportion of any product which is the subject of the

regulation must be supplied from domestic sources.” Article

III:8, however, excludes government procurement from the

application of the provision of national treatment, which is

subject to the obligations under the GPA for those countries

that are parties to it. Article XI.1 of the GATT prohibits the

use of quantitative restrictions on imports and exports

through quotas, licenses, and other measures.

Article XVII of the GATT 1994 relating to State Trading

Enterprises requires state-owned enterprises (SOEs)

to operate in accordance with the principles of non-

discrimination and requires that their purchases and sales be

conducted “in accordance with commercial considerations,

including price, quality, availability, marketability,

transportation and other conditions of purchase or sale, and

shall afford the enterprises of the other contracting parties

adequate opportunity ... to compete for participation in

such purchases or sales.” This is particularly relevant because

in many resource-rich countries SOEs play a signiﬁcant

role by engaging in commercial operations. A number of

LCR provisions affecting the oil sector are relevant to SOEs

and are therefore expected to fall within the provisions of

Article XVII of GATT 1994. This provision, however, does not

regulate the obligations of foreign companies to enter into

joint ventures with SOEs, as required, for example, in the

2014 law in Mozambique or in Angola.

The TRIMs complements Article III of the GATT regarding

treatment accorded to investment. Host countries are

required to provide no less favourable treatment to foreign

investors compared to what they provide to their national

investors. The TRIMs provide an illustrative list of potential

measures that may contravene the Agreement. These are

assessed on two considerations:

1. Investment measures must be trade-related (although

goods only);

2. Measures to fall within the scope of the illustrative

list, that is, must be “mandatory or enforceable

under domestic law or under administrative rulings

or compliance with which is necessary to obtain an

advantage”, and which

a. Require the purchase of a product of domestic origin,

whether of speciﬁc products or in speciﬁc amounts; or

b. Limit the purchase (in value or volume terms) of

imported products.

The TRIMs agreement prohibits the use of LCRs that

requires a speciﬁc percentage or quantitative target of local

goods purchases by companies, and has trade-balancing

requirements that restrict the volume or value that a

company can import to an amount related to the level of

products it exports. Finally, the TRIMs proscribes any use

of export restrictions or bans, such as those adopted by

Indonesia in 2012 to implement a 2009 law on unprocessed

metals and non-metallic minerals to ensure smelting and

downstream beneﬁciation unless mining companies submit

plans for smelter construction. Table 2 highlights some

examples of TRIMs-related measures in place in a selected

number of resource-rich countries.

The ASCM is relevant to LCRs in two cases—(i) if measures

to support local content are used as export subsidies; or (ii) if

they are subject to the use of local products over imports, as

provided by Article 3.1 (b) of the agreement.14 Government

policies supporting R&D and innovation are, however,

The GPA consists of 15 parties (Armenia, Canada, European Union

[EU}, Hong Kong, Iceland, Israel, Japan, Republic of Korea, Lichtenstein,

Netherlands for Aruba, Norway, Singapore, Switzerland, Chinese Taipei, and

the US) covering 43 WTO Members (counting the EU and its 28 member

states, all of which are covered by the Agreement as one party). Another

28 WTO Members and four international organizations participate in the

GPA Committee as observers. Ten of these members (China, New Zealand,

Montenegro, Albania, Georgia, Jordan, Kyrgyz Republic, Moldova, Oman,

and Ukraine) with observer status are in the process of acceding to the

Agreement.

Article 3.1 (b) of the ASCM Agreement in particular prohibits the use of

“subsidies contingent, whether solely or as one of several other conditions,

upon the use of domestic over imported goods.”

considered as non-actionable, as provided by Article 8.2,15

and therefore active industrial policies can be designed to

encourage companies to innovate in new products and new

production processes. By permitting subsidies to cover up

to 75 percent of industrial research costs, governments

have considerable ﬂexibility to inﬂuence the technology

development of companies.

LCRs are of concern to service providers. In this regard,

the GATS contains provisions regarding market access

and national treatment that may affect foreign suppliers

(Article XVI).16 For example, in 2010, in an effort to foster

the development of its banking sector, Angola required oil

companies operating onshore to use domestic banks to

process their transactions. Other countries require foreign

companies to give preference to employment of local staff,

to limit employment of foreign staff, or to submit plans

on how they intend to increase local labour participation.

Nigeria, for example, requires that junior or intermediate

positions be reserved exclusively for Nigerians. Similar to

the GATT, government procurement (Article XIII) is excluded

from the scope of the GATS. One main limitation of the

GATS, however, is that its disciplines only apply to those

services sectors that a WTO Member has included in its

schedule of commitments. Most developing countries have

made few commitments and therefore have more ﬂexibility

to apply LCRs to service suppliers.

The GPA entered into force in 1996 and its schedules were

revised in 2012.17 It is a plurilateral agreement that applies

only to the 43 signatories that have acceded to it, although

all WTO Members are eligible to join.18 The objective of

the GPA was to respond to political pressures to address

discriminatory treatment in favour of local suppliers for

government-transacted businesses, in particular in tendering

procedures for contracts above a certain ﬁnancial threshold.19

The major cornerstone is non-discrimination between local

and foreign suppliers. The use of offsets is explicitly excluded

from the GPA but developing countries can beneﬁt from

certain ﬂexibilities if they join it.

Article 8.2 of the ASCM states, “Notwithstanding the provisions of Parts

III and V, the following subsidies shall be non-actionable: (a) assis tance for

research activities conducted by ﬁrms or by higher education or research

establishments on a contract basis with ﬁrms if: the assis tance covers not

more than 75 percent of the costs of industrial research or 50 percent of

the costs of pre-competitive development activity; and provided that

such assistance is limited exclusively; to (i) costs of personnel (researchers,

technicians and other supporting staff employed exclusively in the research

activity); (ii) costs of instruments, equipment, land and buildings used

exclusively and permanently (except when disposed of on a commercial

basis) for the research activity; (iii) costs of consultancy and equivalent

services used exclusively for the research activity, including bought in

research, technical knowledge, patents, etc.; (iv) additional overhead costs

incurred directly as a result of the research activity; (v) other running costs

(such as those of materials, supplies and the like), incurred directly as a

result of the research activity.”

Article XVI covers investment measures related to services relevant to

local content, such as (i) requirements to use domestic service suppliers;

(ii) limitations on the number of service suppliers; (iii) limitations on the

total value of service transactions or assets; (iv) limitations on the total

number of service operations or quantity of service output; (v) limitations

on the total number of natural persons permitted; (vi) restrictions on or

requirements for certain types of legal entities (for example, joint venture

requirements); and (vii) imposition of domestic equity.

The coverage Schedule of the Revised GPA can be found at http://www.

wto.org/english/tratop_e/gproc_e/gp_app_agree_e.htm#revisedGPA.

At present, ten WTO Members are in the process of acceding. These

are China, New Zealand, Montenegro, Albania, Georgia, Jordan, Kyrgyz

Republic, Moldova, Oman, and Ukraine. Five other WTO Members have

undertaken commitments in their accession protocols to initiate accession

to the GPA. They are the former Yugoslav Republic of Macedonia,

Mongolia, the Russian Federation, Saudi Arabia, and Tajikis tan.

While the GATT and the TRIMs are based on a positive list approach

(countries agree to liberalize only those sectors that are put forward in

their respective list of commitments), the GPA is based on a negative list

approach, which means that rules apply to all sectors except those that

the countries chose not to include in the agreement, as reﬂected in their

respective schedules of commitments.

Measures Speciﬁc details Countries

Local procurement Imposed use of certain amount of local inputs in production Nigeria

Trade-balancing

requirements

Limit purchase of imported goods per volume or value of local

product Nigeria

Manufacturing

requirements Certain products are required to be manufactured locally Ghana, Indonesia, Nigeria,

South Africa

Technological

requirements

Require speciﬁed technology to be transferred on non-commercial

terms and types of R&D to be conducted locally

Chile, Brazil, Malaysia,

Mozambique, Norway, South

Africa

Licensing requirements Require investors to give preference to local suppliers Brazil, Zambia, Ghana,

Mozambique, Nigeria

Local equity requirements Specify percentage of a ﬁrm’s equity to be held by local investors Mozambique, Nigeria

TABLE 2:

Examples of TRIMs-related Measures related to the Extractive

Sector

In their recent reforms, several resource-rich countries

have inscribed mandatory LCRs in their contracts or legal

frameworks, sometimes in the form of explicit thresholds, or

in the form of conditions of operation, or as part of bidding

evaluation guidelines with preferential considerations

for local suppliers. Countries such as Nigeria, Indonesia,

South Africa, or Brazil have enacted such measures, despite

varying scope and compliance enforcements. Table 3 gives

a comprehensive overview of cases where LCRs and WTO

rules overlap. Some of those measures (in particularly those

that are both mandatory and quota related) are clearly in

breach of WTO rules. Some measures, despite their non-

mandatory nature, may fall within the scope of the rules if

they are deemed “necessary to obtain an advantage.” Others

simply fall outside the scope of the TRIMs and therefore are

not in breach of the rules. Table C in Annex 1 summarises the

relevant WTO provisions that apply to LCRs.

It is interesting to note that despite the relatively clear

WTO rules regarding the (in)compatibility of mandatory

and quantitative LCRs and despite the proliferation of such

measures in particular in resource-rich countries, so far only

two cases related to TRIMs have been brought under the

dispute settlement mechanism (the Indonesia – Automobiles

and Canada – Feed-In Tariff cases). None of them relate to

the extractive sector. This is probably because governments

may be reluctant to challenge tools that they themselves

have used or continue to use. Or it may be because investors

do not ﬁnd that the WTO dispute mechanism responds

sufﬁciently to their concerns, in particular as it does not

confer monetary compensation and therefore may not repair

losses due to contract cancellation or penalties incurred. In

contrast, most disputes regarding LCRs in extractives have

been brought by investors against host countries under

dispute mechanisms of bilateral investment treaties (BITs),20

as discussed in the next section.

LCRs, bilateral investment, and other preferential trade

agreements

LCRs are strongly present in various BITs and in investment

chapters of preferential trade agreements (PTAs) (Cosbey

2015). The objectives are to (i) bridge some of the gaps

regarding investment and investors’ protection in the WTO

rule books; (ii) cover areas that fall outside the scope of the

WTO; and (iii) deﬁne new sets of rules best adapted to the

changing nature of the global trading system, as economies

and production structures are increasingly integrated.

The 1994 North American Free Trade Agreement (NAFTA)

was quite a pioneer in introducing strong disciplines

regarding LCRs imposed on investors. Since then, a number of

Organisation for Economic Co-operation and Development

(OECD) countries have included similar provisions,

though with varying scope and disciplines. However, most

agreements between developing countries do not address

performance/LCRs. These are the International Centre for Settlement of Investment Disputes

(ICSID), the United Nations Commission on International Trade Law

(UNICITRAL), the Permanent Court of Arbitration (PCA), and the

Arbitration Institute of the Stockhol m Chamber of Commerce (SCC).

The coverage of disciplines under BITs varies widely and can

be grouped in four main categories (for a detailed analysis,

see Nikièma 2014).

1. Non-binding clauses that only encourage countries not

to use LCRs. This is mostly found in “old-generation” BITs

signed by developed countries.

2. Those that make a cross-reference to the TRIMS, making

the latter compulsory under the BIT. These are the

most common clauses that refer to LCRs. It may seem

trivial but this is a critical element because with such a

reference the TRIMS becomes subject to the investors-

state dispute mechanism of the BIT.

3. TRIMS “plus” clauses that discipline LCRs after the

investment has been made. The disciplines can go

beyond what the TRIMS requires and can prohibit,

condition, or discourage LCRs in the form of technology

transfer, employment conditions, joint ventures, local

procurement, domestic equity participation, and so on.

4. TRIMS “plus” clauses that cover pre-establishment as

well as post-establishment phases. This is a signiﬁcant

addition to WTO provisions, as it also disciplines the

conditions of entry of an investor (such as establishment,

acquisition, or expansion), including granting most-

favoured nation (MFN) or national treatment during

the pre-establishment phase. This can constrain host

countries in seeking joint ventures or equity participation.

This clause is common in post-NAFTA agreements by

the United States (US) and Canada, and now since the

Canada-EU free trade agreement (FTA), increasingly in

the EU’s investment chapters in recent FTAs.

It is estimated that there are some 3,000 BITs in force

globally (Cosbey and Mann 2014). One of their strengths

lies in their relatively more effective complaint mechanism,

compared to the WTO, viewed from an investor’s

perspective. While the WTO dispute settlement system

provides a predictable state-to-state level mechanism, in

BITs, investors can challenge states directly. This tends to

increase the frequency of arbitration and cases (Nikièma

2014). Today, investor-state disputes are the most widely

used mechanisms in international trade law to address

LCR disputes. Of the 600 known cases of investor-state

arbitration, 25 percent cover cases related to the mining, oil,

and gas sectors (Cosbey and Mann 2014), although not all

of them relate to LCRs. Contrary to the dispute mechanism

at the WTO, arbitral award cannot be reversed and ﬁnancial

compensation can be signiﬁcant for damage claimed.

Local procurement requirements

(including goods, services and employment)

Ownership

requirements

GATT III GATT XI TRIMS ASCM GATS TRIPS Art XVII (SOE)

Australia: Buy Australia at Home and Abroad

scheme: Funding in budget to reinforce local ﬁrms

competitive position in procurement bids (to

maximize returns on the resource boom by linking

Australian suppliers to large resource projects)

Brazil: Buy Brazil Act (2010): clause in government

procurement (up to 25 percent preference for goods

and services produced in Brazil)

+ + +

50 percent state participation in production licences +

Minimum LCRs from indigenous suppliers: 70

percent for onshore, 51 percent for offshore in

shallow water of up to 100 metres, and 37 percent

for deep water between 100 and 400 metres

+ +

Licensing is determined by R&D contributions

and technology transfer from foreign-owned oil

companies

+ +

Ghana : Entities in the petroleum industry must

submit local content plans regarding the use of local

goods and services and the transfer of advanced

technologies and skills to the Ghana National

Petroleum Company (GNPC)

+ + +

Indonesia: 2008 mining law, promoting local

processing of raw materials (mineral, including

bauxite and nickel, and coal). Regulation does not

prohibit exports of these products

+ +

Decree prioritizing the supply of mineral coal to

domestic needs (to manage and prevent shortages) + + +

Regulation requiring local and foreign bidders for

energy service contracts to use a minimum of 35

percent domestic content in their operations

+ +

Threshold of mining and coal production prioritizing

supply to domestic needs at a benchmark price in

accordance with effective price in the international

market (to manage shortage)

+ +

Requirement to prioritize use of domestic goods and

services in investment in energy sector +

Industry law adopted in December 2013 increasing

state ownership in strategic industries and the use

of domestically produced goods and services. Law

includes export ban requirements on certain raw

materials

+ +

TABLE 3:

Selected Countries’ Measures on LCRs and Potential Relationship

with WTO Provisions

Sources: Author’s compilation, Trade Monitoring Database, WTO (Feb.

2015).

Note: The table highlights where LCRs and WTO agreements intersect.

However, it does not say whether these measures are compatible or

not with the rules. This would require a more in-depth analysis of each

legislation in detail.

Local procurement requirements

(including goods, services and employment)

Ownership

requirements

GATT III GATT XI TRIMS ASCM GATS TRIPS Art XVII (SOE)

Export licensing introduced for some minerals and

metals +

Limits imposed on foreign participation in energy

and mineral resources sectors and production

control by government

+ +

Renegotiations of contract of work and restrictions

on foreign employees +

Mozambique – Mining: LCRs for goods and services + + +

Requirements for operators to give preference to

local goods and services (provided they meet price,

quality, and delivery standards)

+ + +

Requirements to provide employment and technical

training to local staff +

Mozambique – Petroleum: Requirement to allocate

25 percent of petroleum production to domestic

market

+ +

Increased ownership of SOE in concessions +

SOE to take lead role in production, marketing, sales +

Local procurement requirements for goods and

services + + +

Requirements for joint ventures to supply goods and

services +

Requirements for operators to give preference to

local goods and services (provided they meet price,

quality, and delivery standards)

+ + +

Requirements to provide employment and technical

training to local staff +

Mineral processing in Mozambique + + +

Nigeria : LCR obligations for the oil and gas sector

10 percent preference for local tenders + + + +

Schedule A of Nigeria Oil and Gas Content

Development of 2010 speciﬁes level of LC to be

achieved per activity

+ +

All companies and operators are required to employ

only Nigerians in junior and intermediate positions

and only 5 percent of expats in management

Equity shares to be held by Nigerian companies + +

Requirements to give ﬁrst consideration for goods

manufactured in Nigeria + +

Fiscal and tax incentives for companies that

establish operations in Nigeria to carry out

production, manufacturing, or production of services

South Africa : Preferential procurement regulations

granting preferences for local products and

preferences under the Broad-Based Black Economic

Empowerment scheme

+ + +

Policy directives on exports of ferrous and non-

ferrous wastes and scrap metals +

Zambia: Maximum preference to be given to local

procurement + + +

Joint ventures and partnerships with local companies +

TABLE 3 CONTINUED:

BITs disputes are generally costly and the balance of power

has often tilted in favour of investors, given their extensive

legal expertise. For this reason, many resource-rich countries

have recently started to review their BITs, even taking steps

to unilaterally denounce them and replace them with other

forms of legal frameworks that seek to provide similar levels

of protection to investors, but diminish the risk of state-

business disputes. One of the challenges though is that some

protections provided for in BITs may continue to exist even

beyond the legal life of the agreements.

PTAs that have strong investment chapters are increasingly

including LCR disciplines. The recent Canada-EU Trade

Agreement (CETA) is a case in point. This trend is expected to

continue in mega-regional trade negotiations with a view to

deﬁne new sets of rules to level the playing ﬁeld for investors

to remain competitive in an increasingly interconnected

environment.

DEVELOPING COUNTRIES: SPECIAL AND

DIFFERENTIAL TREATMENT AND POLICY

SPACE

The GATT, the TRIMs, and the GATS all contain various

ﬂexibilities for developing countries under special and

differential treatment (SDT) provisions.21 These include

longer time periods to implement agreements and

commitments and special provisions to allow countries

to temporarily derogate from some commitments for

development needs. In total, there are 139 SDT provisions in

WTO Agreements for developing countries.22

Developing countries are permitted to retain TRIMs under

Article 4 on a temporary basis to the extent that the

measures are consistent with the speciﬁc derogations

permitted under Article XVIII of the GATT 1994 by virtue of

economic development needs and subject to notiﬁcation

to the General Council.23 The provision allowing developing

countries longer transitional time periods has expired.

However, there exist ﬂexible provisions in other WTO

Agreements, which may be relevant to developing countries

and in particular to low-income countries, granting them

more policy space to develop their local industries. For

instance, there exists ﬂexibility to encourage foreign

suppliers to assist in technology transfers and training

through offset transactions. Least developed countries

(LDCs), in particular, beneﬁt from added ﬂexibilities and

may be exempted from applying certain provisions due to

their speciﬁc economic conditions, notably under numerous

exceptions provisions in different agreements (such as the

ASCM), which take into account their special circumstances.

They are under SDT provisions allowed to derogate from the

application of some provisions of the agreements, and under

special exemptions or waivers, provided longer transitional

periods to implement certain agreements, such as the Trade-

Related Aspects of Intellectual Property Rights (TRIPS)

(Ramdoo 2015).

The GATS has a different approach to SDT. It addresses

the concerns and needs of developing countries by

providing ﬂexibility on an individual basis, which is

reﬂected in numerous provisions of the Agreement. In

addition, developing countries are allowed to undertake

liberalization commitments in a manner consistent with their

development needs, which are negotiated on a case-by-case

basis.

BITs also contain exceptions and reservations on LCR

disciplines. Their scope is signiﬁcantly narrower than WTO

provisions in that they are not related to development

objectives but rather to environmental requirements and

health safety concerns.

For a comprehensive analysis of industrial disciplines and the WTO, see

“Report of the First Expert Group Meeting on Reinvigorating Manufacturing:

New Industrial Policy and the Trading System”; www.e15initiative.org.

See Note by the WTO Secretariat for the Committee on Trade and

Development on Special and Differential Treatment in WTO Agreements

and Decisions, 14 June 2013, WT/COMTD/W/196.

Article 4 of the TRIMs allows developing countries to d erogate temporarily

from TRIMs obligations, as provided for by Article XVIII of the GATT 1994

and related to WTO provisions of safeguard measures for balance of

payments difﬁculties.

Multiplying national initiatives to foster the development

of linkages and greater participation of local actors through

LCRs conﬁrm a general trend. Resource-rich—but otherwise

poor—economies are setting their priorities to get more

beneﬁts from their natural endowments and they see local

content policies are a necessary trade-off between short-

term efﬁciency and long-term economic development

(Tordo 2011).

Yet, from an international trade and investment perspective,

there are a number of legal constraints on how far countries

can effectively go in putting in place and implementing such

measures. These underline the importance of exploring

effective ﬂexibilities and alternatives but also coherent policy

options with a range of stakeholders to have a balanced and

pragmatic approach, which makes economic sense, both

for governments that need to stimulate job creation and

LOOKING FORWARD:

REGULATE MORE OR

REGULATE BETTER?

industrial development and for businesses that need to be

able to operate efﬁciently and competitively in a stable and

conducive environment. The approach will be viable if it makes

political sense as governments are pressured domestically to

show results. This is a tough task and there is no blueprint.

Rather, initiatives will have to be country- and context-speciﬁc,

as various successes and failures have demonstrated.

This section makes some concrete suggestions on what

could potentially and realistically be done, at different levels

and by different stakeholders. The objective of this section

is not only to argue for more regulations but also for better

regulations to ensure fair practices that are compatible with

the rules, while meeting both the development objectives

of resource-rich countries and the interests of extractive

industries.

MAKING THE SYSTEM CLEARER: ENHANCING

TRANSPARENCY, PREDICTABILITY, AND

FLEXIBILITY

Existing rules regarding some forms of LCRs, as deﬁned

in WTO agreements, are quite clear—they are prohibited,

disciplined, or allowed. When these measures were found

insufﬁcient to address the concerns of investors, countries

concluded tighter agreements, in the form of BITs/

international investment agreements (IIAs) or preferential

trade agreements (PTAs), making LCRs almost impossible

to put in place. Yet, this has not prevented the proliferation

of new measures. It points to that there are signiﬁcant

weaknesses with the way rules are currently deﬁned and

enforced.

Transparency

The ﬁrst weakness to be addressed regards the deﬁnition

of LCRs, which is still subject to wide interpretation. It is

therefore proposed to develop an understanding within

the legal text on LCRs that sets out clearly the contours of

a common deﬁnition. This could be an Annex to the TRIMs

agreement.

Second, while changing WTO rules might take time, it is

important to consolidate the role the organisation can play,

in particular to reﬂect on ways to have a more coherent

approach, given the multiple bilateral trade and investment

agreements signed by its Members. WTO transparency

mechanisms (such as notiﬁcation obligations, reviews in

speciﬁc committees, and the trade policy review mechanism)

are powerful information tools to monitor the evolution of

the trade and investment frameworks in countries. Some

information is available in the Trade Monitoring Database

(TMD).24 But this needs to go one step further. The TMD

should be complemented with an online forum where

members as well as industries can access information

regarding policy instruments and measures that require LCRs.

Third, no cases have been brought so far at the WTO

Dispute Settlement Body (DSB) on extractives-related LCRs,

while BITs and IIAs disputes have extensively focused on

the extractive sector. The main challenge is that there is a

lack of transparency in arbitral rulings and proceedings that

take place under the bilateral dispute mechanisms. While

the International Centre for Settlement of Investment

Disputes (ICSID) proceedings are published, UNICITRAL

ones are often conﬁdential. Arbitration under FTAs (if

there are any regarding extractives and LCRs) is likely to be

also conﬁdential. It is therefore crucial to have a place to

centralise information related to all those cases. The online

forum could be one way to do this.

Predictability

While transparency is necessary, it is not sufﬁcient in itself.

Therefore, to complement the above, countries should have

space to engage and discuss these issues at a dedicated

platform.25 It will allow the information to be used to reﬂect,

shape, and frame better rules and ﬂexibilities for developing

countries regarding “inescapable” issues that are being

developed outside the multilateral system. Participation in

this platform should be broadened to regional economic

communities (RECs), which have their own experiences

on setting guidelines on these issues, and also to other

stakeholders, such as other international organizations or

representatives of the private sector.

Linked to the question regarding transparency in BITs’

arbitration, there is a perceived inconsistency and

unpredictability when it comes to the interpretation of BIT

provisions across agreements during arbitration procedures,

which precludes the emergence of a consistent body of

law (EFILA 2015). It is, however, recognised that there is a

limitation linked to the “bilateral” nature of these disputes.

Yet, in the absence of a multilateral framework, there are

likely to be systemic issues that impact the predictability of

the system.26

Adapting the rules with ﬂexibility: a plurilateral approach

LCRs are largely an investment issue and therefore require

an investment policy solution. Yet, the continued relevance

of the WTO amid the evolving trade and investment system

will be conditional on its capacity to adapt to reﬂect the

new realities. One way to address this is to design a variable

geometry approach, while ensuring that the concerns of

developing countries are addressed. This means allowing

space for some countries desiring to move faster on certain

issues the ability to do so, keeping the door open for others

to join at a later stage, and allowing all others to observe. It is

See http://tmdb.wto.org/.

Along the lines proposed in Suominen (2014).

See think-pieces related to the E15Task Force on Investment Policy

therefore proposed to adopt a carefully designed plurilateral

framework on investment, with a set of protocols and rules

of operation to guide such negotiations (Lawrence 2006,

2008), which will then be agreed to by all Members of the

WTO. Experiences exist, with the previous Tokyo Round

Codes, the current plurilaterals that fall within the scope

of Annex 4, and in side agreements such as the Information

Technology Agreement (ITA).27

For this to work, however, it is important to assess the risks

of such an approach as it may dilute the ability of non-

parties to negotiate deals within the framework of the single

undertaking (Lawrence 2008). Some countries may fear that

fast-movers might start developing new (and stricter) rules

and regulations among themselves that might be difﬁcult

to (re-)negotiate, with a view to multilateralise those at a

later stage (Draper and Dube 2013). Yet in a context where

the WTO might be losing clout, this might be the most

pragmatic approach as it will allow those negotiations to

be done in a transparent manner, remain open, and, most

importantly, remain within the system.

ALTERNATIVE POLICIES TO LCRS: PROMOTING

REGIONAL CONTENT

Alternatively, RECs can play a key role in seeking to establish

better rules, essentially for two reasons. Due to their localised

mandate, they have a tendency to focus on areas of common

interests to their members, such as building regional markets

that reﬂect the speciﬁcities of their respective regions and

designing rules that ﬁt the development levels of their

member countries. While these may create some challenges

for the multilateral system, they may also provide a

platform to engage on improving the rules using a sequenced

approach.

One of the economic goals of RECs is to build regional

markets for domestic industries to source inputs and sell

outputs. By removing intra-regional trade barriers, they also

aim at encouraging the creation of national and regional

value chains. If national and regional policies are well

coordinated, this can be a useful complement to national

efforts to create strong local clusters in and around the

extractive sector. In this context, rules of origin (RoO),

as alternative policies to foster local content objectives,

play a signiﬁcant role. The NAFTA, for instance, requires a

certain level of regional content that signatory countries

have to meet to qualify for free trade rules but provides

for full cumulation among member states.28 Similarly, the

creation of the single market in Europe has strengthened

industrial development through free movement of factors of

production.

On the rules side, RECs are generally good sounding boards

for what would be economically acceptable in terms of

industrial policies because their member states generally

have economic interests in common. Sounding the depth of

their commitments in the ﬁeld of industrial policies and how

they manage (or not) to deal with sensitive issues regarding

market access for certain products might help anticipate

how their member states will react, should these issues be

discussed at the multilateral level. RECs should play a more

important role at the WTO. Some (the EU, for instance)

are already playing a key role because they have exclusive

competence in trade, others however do not have the

mandate to do so. Yet, there is potential to use them better.

It might be too ambitious at this stage to argue for some

principle of subsidiarity, where issues that cannot be dealt

with at the WTO for lack of consensus will be ﬁrst dealt with

at the regional level. Multilateral negotiations would then

adopt an incremental approach, whereby the basic principles

where all RECs have a common understanding would be

taken as agreed, and negotiations would start from there.

This will allow discussions to start on a pre-established basis

and secure ownership because RECs will have already secured

the agreement of all their members.

POLICY COORDINATION: WHAT ROLE FOR THE

PRIVATE SECTOR?

At the national level, successful cases in Chile and elsewhere

have shown that there is a case to support strong collaborative

partnerships among ﬁrms, governments, and research

institutions to strengthen the competitiveness of local ﬁrms

as well as their productive capabilities. Within that framework,

governments may have more ﬂexibility to design horizontal

support, including ﬁnancial support, to local businesses and

in particular to SMEs, or other forms of incentives to attract

investment in clusters, provided that such measures equally

apply to other sectors of the economy.

Draper and Dube (2014) distinguish between inclusive and exclusive

plurilaterals. Inclusive plurilaterals generally entail conditional, unilateral,

sectoral liberalization. They are market access instruments, and would

probably not apply to rules. Liberalization is conducted on an MFN basis,

and is conditioned on other main trading powers also conducting such MFN

liberalization. A critical mass is necessary to start the negotiations. They are

challenging to achieve, but once agreed upon they do not require consent

by all WTO Members. The ITA is one example of inclusive plurilateral. This

approach has the advantage of achieving liberalization breakthroughs

where broader negotiations are stalled, such as under the Doha Round.

However, it carries the longer-term danger that major exporting interests

could be removed from the equation of subsequent, broader liberalization

efforts. Exclusive plurilaterals involve liberalization only for those Members

participating and signing up to the subsequent agreement and beneﬁts

are only available to parties to the agreement. Exclusive plurilaterals take

several forms—goods PTAs, covered by GATT Article XXIV; services PTAs,

covered by GATS Article V; and those residing under the Marrakesh Treaty,

Annex 4, such as the GPA. It does not apply on an MFN basis and requires

consensus, which might be difﬁcult to reach, in particular as many large

developing econ omies are opposed to it.

With the exception of automotive products.

At the industry level, the International Council on Mining and

Metals (ICMM) has developed a methodology to promote

the engagement of a wide range of stakeholders in the

mining sector to assess its social and economic contribution.

This should not happen in a silo. Dialogue should be

enhanced and structured on a more systematic basis to

allow policy coordination, with a view to fostering the

design of comprehensive strategies at all levels (domestic,

regional, and multilateral) that take into account the realities

of all stakeholders involved to adapt to policy changes as

economic and political realities evolve and to feed back into

the multilateral system.

POLICY COHERENCE AND EFFECTIVENESS

ACROSS INITIATIVES

Following the endorsement of the Africa Mining Vision

(AMV) by African Union heads of state in 2009, the Africa

Mineral Development Centre (AMDC) was created to

support resource-rich countries and RECs to implement

the AMV; to monitor and evaluate progress; and to provide

strategic guidance, coordination, and expertise regarding

its domestication. The implementation of the AMV at

the national level is a critical condition to ensure that any

strategic national policies regarding the sector concur with

the continental policy orientation. Similarly, regional policies

that support the development of the extractive sector should

ensure that these are compatible with the objectives of the

AMV.

Finally, an improved regulatory environment is conditional

upon policy coherence and coordination across international

initiatives, whose objectives are to improve the governance

of the extractive sector. Numerous initiatives and institutions

have been established to address speciﬁc issues or to

achieve mutual goals. For instance, the Extractive Industries

Transparency Initiative (EITI) aims at improving transparency

and accountability in the extractives sector. Although not

all countries are members of the EITI, this is an important

element in the governance of the sector.

Allende, J. 1988. Historical Constraints to Privatization: The

Case of the Nationalized Chilean Copper Industry. Studies in

Comparative International Development.

Barnett, A. and Bell, M. 2011. “Is BHP Billiton’s Cluster

Programme in Chile relevant for Africa’s Mining Industry?”

Policy Practice Brief 7, Policy and Practice, Aug..

Cimino, C et al. 2014. “A Proposed Code to Discipline Local

Content Requirements.” Policy Brief, Peterson Institute for

International Economics, Feb.

Clifford Chance. 2014. New Petroleum Law: The Future of Oil

and Gas in Mozambique. Brieﬁng Note, Oct. 2014.