Local Content Policy and the opportunities for corruption – Part 2

Jul 30, 2017 News, http://www.kaieteurnewsonline....r-corruption-part-2/

Last week, we initiated a discussion on Guyana’s move towards developing a strong Local Content Policy (LCP) and how important this document will be to the nation’s future oil wealth.

Also examined in that article were some of the opportunities that exist for corruption. (See link for further details on that news item — http://www.kaieteurnewsonline....ties-for-corruption/).

This week’s article continues along that line.

ENFORCING LCP RULES
The discretion often enjoyed by public officials responsible for implementing local content policies, combined with a lack of transparency, opens the door for uneven implementation and enforcement of local content rules.

With this in mind, Transparency International, a global anti-corruption watchdog, cited the case of Kazakhstan. In that nation, international oil companies have complained that local content implementation is “uneven, irregular, and nontransparent, particularly at local levels of government.”

This was particularly noted and documented by the US Department of State in 2013. It was also noted that companies in the country have complained of the indiscriminate use of sanctions for noncompliance with local content requirements.

Transparency International said that discretion is also enjoyed by public officials to decide the circumstances in which local content rules do not apply. This can be seen in the case of Nigeria, where the Minister for Petroleum Resources can decide to waive the obligations for a given firm or project under Nigeria’s 2010 Content Development Act.

The global watchdog believes that such discretion may provide incentives for corruption, particularly if the criteria for evaluating waiver applications is not made public, or is not applied in an objective or transparent manner.

This very point was made in 2013 by the World Trade Institute.

Furthermore, political interference in the application and enforcement of the law is also seen as problematic in the majority of countries, where the Executive branch of government exercises huge influence over other government branches and agencies as well as state-owned enterprises.

In Mozambique, for instance, Oxford Policy Management noted that in 2012, the national oil company ENH plays a key role in defining the country’s local content strategy. Nevertheless, the company reportedly suffers from political interference and its senior executives are closely connected to the political and business elite, opening space for these groups to extract rents in the sector.

CORRUPT JOINT VENTURES
According to Transparency International, joint ventures are used by oil and gas companies as “a way to share the higher risks and costs associated with the industry or as a way of bringing in specialist skills to a particular project”.

In fact, joint ventures have also been used in the implementation of local content policies. In some countries, Transparency International said that foreign companies wishing to operate in the oil and gas sector can only do so by entering joint ventures with local companies – which usually are state-owned enterprises.

Corruption risks in this process are many, said the global watchdog. It said that there are the risks of corruption in the negotiations phase as discussed above, in the selection of joint venture partners and risks of conflict of interest, among others.

In fact, it was found that in the majority of countries, international companies do not have extensive options for potential joint venture partners. Considering the oil and gas industry in developing resource-rich countries and the close ties between the political and economic elite, Transparency International said that partners are usually state-owned enterprises or companies that are somehow connected to public officials.

As the main characteristic of a joint venture is joint control, the body said that partners are able to appoint government officials to sit on the joint venture board. This generates two main risks of corruption.

“First, the risk of conflict of interest and favouritism as discussed before. Second, according to international anti-corruption laws, such as the UK Bribery Act and the Foreign Corruption Practices Act (FCPA), international oil companies are liable for any bribes or corrupt behaviour by joint ventures partners who act on their behalf,” noted Transparency International.

It noted too that foreign companies face similar compliance challenges with regard to their relationships with third parties.

Transparency International said, “When subcontracting part of their operations to local companies, international companies may also be held liable if these companies engage in corruption. In the UK this is an area of concern for oil and gas companies, as they were already subject to the most prosecutions for bribery and graft of any sector during 2008 and 2012, and for payments and kickbacks made abroad by themselves or partners.”

SHELL COMPANIES
Local content policies may also be circumvented through the use of “fronts” and shell companies. According to Transparency International, foreign oil and gas companies may “hire” local established companies to serve as fronts to satisfy local content requirements.

In this case, the global body said that international oil companies may pay companies registered in the host country to participate in bidding processes; the services are then implemented by the international company, as the local company does not have the capacity or exist.

Transparency International said, “For instance, in Angola, there is evidence that international oil companies are paying illegal fees to contract with front companies in order to comply with host-country laws. The ownership and shareholding structure of these companies is often opaque, and they often lack the capacity to deliver on the awarded contract, with the work usually being carried out by the international oil company.”

In addition, the body said that special purpose vehicles, such as shell companies, may also be used to circumvent local content requirements, particularly in countries where local content rules do not clearly define what constitutes a “local” or “indigenous” company.

Within this framework, the organization said that any company or international service provider registered in the host country, without having to disclose their beneficial owner, can potentially bid for contracts.

The anti-corruption unit said that without requirements to disclose the beneficial owner, it is difficult to assess whether the company in question, is actually owned by a national. It was careful to highlight that this was the case in Nigeria, where local content requirements were misused and contracts to supply the oil industry were awarded to shell companies, inflating costs and increasing the project.

Moreover, Transparency International warned that shell companies may also be used by politicians to disguise conflict of interest and facilitate the award of local content contracts to companies in which they hold interests.

To be continued…

Local Content Policy and the opportunities for corruption

Jul 23, 2017 News, http://www.kaieteurnewsonline....ties-for-corruption/

By Kiana Wilburg
Oil has struck quite a lively debate in recent times. Many persons have been critical of the posture the Government has taken which, on the surface, can be easily described as cautious or self-protective. Media entities have been dishing out articles almost daily about the ills of the sector and apprehensive citizens are asking important questions.
All are curious about what the Local Content Policy (LCP) will entail when ExxonMobil’s operations get into full swing.

But while it is all well and good for there to be calls for Guyana to have a Local Content Policy that is effective, one must be wary of the opportunities for corruption that exist here.

IMPORTANCE
According to Transparency International, resource-rich developing countries usually suffer from low levels of economic and social development.

The global watchdog says that, increasingly, governments have strived to introduce policies and rules that would allow society as a whole to benefit from oil and gas activities. Local content is one of these policies.

The International Petroleum Industry Conservation Association defines LCP as “the added value brought to a host nation through workforce development (employment and training of workforce), and investments in supplier development (developing and procuring supplies and services locally)”

The World Bank in 2013 stated that the main objectives of local content policies are to: create jobs; promote enterprise development; and accelerate the transfer of skills and technologies.

The World Bank has noted that LCPs vary from country to country.

The objectives of these policies, however, are outlined and further detailed in legislation as well as in contracts, licensing agreements or concession agreements between the government and international oil and gas companies.

The World Bank even notes that some countries have taken LCPs so seriously that they have adopted severe penalties in the event of non-compliance. One such country that is an example in this regard is Kazakhstan.

On the other hand, there are countries which prefer the diplomatic route, as they sought to simply “encourage” oil and gas companies to give preferential treatment to local suppliers and workers.

According to the World Bank, local content rules vary across countries. For instance, in Nigeria, the Oil and Gas Industry Content Development Act of 2010 specifies the minimum amounts of local materials and personnel used by oil and gas operators in the country.

In Kazakhstan, a target of 50% local procurement from Kazakh suppliers has been established.

In Angola, a series of local content rules apply for the procurement of goods and services. For instance, there is a list of goods and services that can only be supplied by companies based in Angola; for other goods and services, foreign companies can only participate in tenders in association with an Angola-owned company.

While LCPs have a most noble objective, Transparency International has found that there are opportunities for corruption.

According to the global watchdog, there are a handful of practical challenges that may hamper the effective implementation of these policies, including limited industry capacity to kick-start the process, lack of coordination and often coherence among government agencies, high levels of bureaucracy and opacity, as well as widespread corruption and weak accountability mechanisms.

RISK OF CORRUPTION
If not implemented and managed carefully and made subject to public scrutiny, it is believed that local content can offer significant corruption opportunities.

According to the Global Witness, this form of corruption is “even more damaging than one-off payments for contracts because it means revenues can be stolen from the state continuously, and in a way that is much more difficult for an audit to detect”.

But Transparency International (TI) notes that the literature on corruption risks in local content is, however, very limited.

TI said that available reports indicate that many of the corruption challenges faced by developing resource-rich countries also influence and have an impact on local content policies.

Within this framework, it said that measures that are usually adopted to curb corruption within the public administration, such as enhancing transparency in decision-making, establishing clear and transparent procurement rules, providing access to public documents, and strengthening oversight, are also instrumental to prevent and curb corruption in local content.

Be that as it may, Transparency International noted that there are some characteristics specific to the development and implementation of local content policies that may offer opportunities for corruption.

FAVOURITISM/CONFLICT OF INTEREST
Transparency International has found that many resource-rich countries are considered to be patrimonial societies, where the distinction between public and private is very blurred.

The body said, “Politicians and decision-makers are usually very close to the economic elite, and in several cases are the main beneficiaries of local content requirements. As such, local content rules end up benefiting and generating revenues for government-affiliated individuals, failing to achieve some of their objectives such as promoting enterprise development and the broader sustainable development of the country.”

Transparency International said that there are several examples of conflict of interest and favouritism in the design and implementation of local content policies.

In this regard, it pointed to the case of Nigeria, where local content was easily used by the political and economic elite to extract rents, as well as in Uganda, where close ties between senior public officials and the private sector led to the distortion of the policy-making process and the award of licences and other local content benefits.

The body also noted that several studies have shown that local policies and resources are often directed to groups based on their affiliation, ethnicity and loyalty to the President.

Transparency International highlighted that Angola’s local content policy, for example, has been considered highly vulnerable to exploitation by public officials and their close allies in the private sector.

It said that investigations conducted by Angolan organisations and the US government have raised questions regarding contracts awarded to companies belonging to Angolan decision-makers.

Transparency International said that according to the investigations, in compliance with the local content law that requires international companies to partner with local companies to be able to operate in Angola, an American company entered into a consortium with two Angolan companies to participate in oil blocks.

“However, it turned out that the real owners of one of these local companies were the former chairman and CEO of Sonangol, the Angolan state-owned oil company (responsible for the agreement with the American company), and a minister of state,” the international organization stated.

Moreover, Transparency International has found that opaque and discretionary decision-making may also allow public officials to extort international companies wishing to operate in the country, in order to favour their own companies or those of close friends and family members.

As such, TI said that public officials responsible for the award of contracts and licences may force operating companies to enter partnerships or sign service contracts with particular companies. The global anti-corruption body said that in many cases, the local companies chosen by the public official do not even deliver the services contracted.

In this regard, the Global Witness in 2012 found that international companies merely have to pay the agreed cost which functions as a bribe in order to be awarded the contract and perform the services themselves.
Transparency International noted that in Kenya, for example, the rules in place are considered inadequate and prone to corruption.

According to NGOs operating in the country, “there is a likelihood of local firms being imposed on foreign companies as condition for securing petroleum contracts; and this could provide room for politicians to perpetuate their interest in the oil industry at the expense of the nation” (Kenya Civil Society Platform on Oil and Gas).

To be continued….