Risk Considerations Related to Local Content Requirements

Abstract

Local content requirements (LCR) represent an important tool in many countries’ foreign direct investment strategies. They play a particular role in the industrialization of developing countries and also in the development of new industrial and technological sectors of more developed countries. LCR protect and encourage indigenous industry development by mandating or incentivizing increased local content in investments in a particular industry, sector or region. It is particularly relevant in relation to development of natural resources or other highly regulated industry sectors, especially where technological entry barriers otherwise may prevent local industry from developing. Significant research and academic contribution have examined the economic effects and related impacts of LCR. This article discusses certain other indirect consequences of LCR from the viewpoint of a contractor in the oil and gas industry. Many of the aspects discussed may be similarly applicable to other industries and sectors subject to LCR. This article focuses on risk aspects of LCR frameworks that may impact project development and contractual behavior of the market participants. In addition to discussing how some typical project risks should be considered in a local content regime, the article also addresses some particular risks associated with structures and schemes established to meet local content requirements. As the LCR regimes and their impact vary among countries and sectors, the aim is not to provide conclusive answers. Instead, the article discusses some of the main differentiators attached to delivering under a LCR regime and contractual and risk considerations which should be given particular attention in an international contractor’s local content strategy.