Box 4.4 Local Benefit Most petroleum and mining laws require that foreign companies adopt some measure of preference for local goods and services. In addition to the direct benefits to stakeholders (such as local businesses, entrepreneurs, and communities) through market diversification, productivity, and access to business opportunities, capital, and technology, there are wider benefits typically sought by such requirements: (1) increased employment and skills, (2) increased domestic and foreign investment, (3) technology and knowledge transfer from international resource companies, (4) exports and foreign exchange, and (5) increased government revenues. The definition of local benefit (often called local content in the literature) is very important. Some states consider “local” companies to be those that are registered nationally rather than fully taking into account the degree of added value that these companies create for participation by local individuals. Ideally, preference should be given to companies that are involved in actual manufacturing activity as well as those with significant ownership, management, and employment of local citizens. Companies within the “region” should also be treated as local. For companies as well as states this is a matter of some sensitivity. Internationally operating companies prefer to work with contractors they are familiar with and to use their standard company procedures for holding tenders and procuring goods, services, and other work. Local companies will be unfamiliar, at least initially, with such procedures. For certain kinds of activity, expertise is unlikely to be available among domestic companies. Tensions can therefore be expected in the development of a local benefit policy.
Stabilization. Stabilization clauses are offered as an investment promotion device, often because they are given by other states in the region also competing for investment capital. The guarantees they provide protect the investor’s contractual rights against adverse interference by the state through legislative measures. Although such provisions may not stop the government from exercising its legislative powers, stabilization clauses can mandate that a court or arbitration tribunal compensate the investor for any damage suffered. Aside from a strictly legal assessment of their value in formal proceedings, stabilization clauses may enhance the ability of an
Problems should be anticipated in the following four areas: 1. Where certain goods and services are lacking in the host country 2. Where there is poor quality of domestic goods and noncompliance with international standards and safety requirements (as stated by foreign investors, for example) 3. Where there is a practice of using local mediators as suppliers of goods, services, and other works instead of domestic manufacturers 4. Where there is a lack of employees with the appropriate qualifications The design of a local benefit policy can also create problems in implementation. Take, for example, the following provision mandated in Chad: licensees must “give priority to those goods and services available in Chad insofar as their prices, qualities, quantities, delivery terms and sales conditions compare to goods and services available abroad and do not require the licensee to bear any kind of extra economic burden” (Tordo et al. 2013, 51). Provisions such as these are often insufficiently disseminated, monitored, and enforced. Moreover, it may be difficult or impossible to compare factors such as the reliability or performance quality of a local supplier of goods and services in relation to competing suppliers. Nonetheless, contracts may include fairly elaborate provisions on local benefit requirements that specify criteria, including certification, to identify when materials are not available locally or at reasonably comparable quality standards. They may also involve a monitoring system through the NRC or a specialized government agency or procurement office.
investor to negotiate a more favorable settlement in a dispute with a host state that seeks to revise the terms of the original agreement (see section 4.9 and chapter 6). Therefore, any stabilization clause has to be well balanced and properly drafted to protect the state’s interests in an appropriate manner. Termination. The contract normally stipulates the circumstances that permit either party to terminate the agreement (for example, when there is breach of a fundamental term by the other party). These can include a failure to carry out a work program or a breach of environmental obligations.
CHAPTER 4: POLICY, LEGAL, AND CONTRACTUAL FRAMEWORK
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