Regulating for local content: Limitations of legal and regulatory instruments in promoting small scale suppliers in extractive industries in developing economies

Abstract

Many governments are increasingly eager to ensure resource-based investments lead to broad-based economic growth through local content policies, legislation, and regulatory instruments. However, it is unclear how effective these instruments are. This paper presents the findings of a review into the policy, legal, and regulatory framework for mining and the small-scale supply sector. It identifies the issues of major concern and presents the specific dimensions of business environment reform affecting the use of local, small-scale suppliers by extractive industries. Largely focusing on Africa, this research focuses on Nigeria, Ghana, Mozambique and South Africa. The review found that without external impetus, extractive companies generally have little regard for local content. However, in practice most existing local content instruments enable non-compliance and can also be a barrier to investments characterized by long-term, high-cost operations that are vulnerable to international commodity fluctuations. The development of local content instruments requires a good understanding of the extractive industry supply chains (large and small), and a balance of policy, legal, industrial development/support elements, and an on-going close interaction between governance institutions and entities directly and indirectly engaged in the industry.