AT a recent press conference, Vice President, Dr. Bharrat Jagdeo spoke about ongoing revisions to Guyana’s local content policy to ensure that locally owned businesses are able to compete. He expressed concerns that foreign companies are “taking over almost every sector” and announced broad plans to protect some industries so that Guyanese companies do not have to compete with internationals.
Jagdeo named specific sectors, including “landscaping, logistics, transportation, food supply, a whole range of cleaning services… rentals… and so on,” which could be closed to foreign companies so that there would be no external competition for local businesses in the oil and gas sector. He went on to say that these sectors will make “tens of billions of dollars” for Guyanese without outside competition.
Local content development is a positive and widely supported process that works to ensure that local companies can participate in growing sectors like the oil and gas industry. But, as with any long-term government intervention into the evolution of the economy, policies must be carefully designed and based on sound principles.
According to Dr. Valerie Marcel, an expert in resource governance at the think tank, Chatham House, it is important for Guyana to focus on areas that will benefit its people for years to come and offer “spillover” benefits by building skills and capabilities that can be applied to other industries after oil is depleted.
While it is good that the government is taking the time to discuss, review, and write its local content policy, eliminating international competition in select sectors could make them more fragile if critical needs can’t be met locally.
In many cases, local firms may be able to meet industry needs for specific goods or services but could struggle with the large volumes typically required on tight deadlines. Labour shortages could arise as well as Guyana experiences growth across many sectors simultaneously. These risks could lead to significant roadblocks to development if they aren’t carefully weighed.
There is no doubt that developing local content is a worthy goal that will help drive Guyana’s economic transformation. Fortunately, the new administration seems to be aware of the risks and is adjusting its policies for different sectors, depending on the current and short-term ability to fulfil key oil and gas sector needs.
The goal of government actions is to pave the way for growing industrial development opportunities in the country over the medium and long term. Partnerships between local and international companies will likely be important to encourage major investments and facilitate knowledge transfers.
Cost is another concern that the government must balance, in addition to capacity development. Oil development costs are recouped from production through cost recovery. That means that approximately half of each dollar spent on contractors, goods and services will come out of Guyana’s future government revenues. Many Guyanese would no doubt be happy to pay a small premium to buy local. But if high demand and low supply make local goods and services much more expensive, it could eat into Guyana’s revenues.
Average people and other sectors will also face increased costs if they have overlapping needs for goods and services where foreign investment is restricted. This could affect their operating costs and overall competitiveness.
In a very small market, like Guyana, where there are limited numbers of companies in each sector, monopolies can also entrench high prices for the long term. If one or two companies come to dominate a sector and local content laws protect them from competition, higher prices could become a major issue and most of the benefits of local content would go to a small number of people at the cost of lower revenues for all.
Guyana remains ahead of the curve on developing a local content policy, despite the risks outlined above. Not all oil and gas producing countries have policies, and it took decades for others to install well-balanced plans. It took Trinidad and Tobago over 100 years to create a comprehensive plan. Suriname is only now progressing policy based on years of development in the oil and gas sector. In contrast, Guyana is expected to release its updated policy and hold additional stakeholder consultations within a matter of weeks, and the local business sector has already made tremendous gains in recent years.
While Guyana should applaud itself for moving quickly on a key issue, it will be crucial to assess and balance competing priorities in the new local content policy, so that efforts to foster key local industries are consistent with efforts to grow revenues, avoid inflation and diversify the economy.