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Local content in extractive industries: a tool for economic diversification and sustainable development

Anita Marangoly George's picture

Also available in: Español | Français

Photo by Dominic Chavez / World Bank

When you ask young people from developing countries what they want for their country, they often say opportunity. The next generation wants jobs and knowledge; they want to be connected to the global economy.

Extractive industries can foster these types of opportunities through investment in skills training and transfer of technology to local workers and companies. These technical skills are demanded in the global marketplace today and empower workers to expand their horizons and lower their risk of unemployment. 

We are discussing these issues today at a “Reconciling Trade and Local Content Development” conference we are co-hosting with the Mexican Ministry of Economy. This event aims to share knowledge on how investment in extractive industries can be leveraged to generate opportunities for economic diversification and employment.

When extractives companies include local business in their supply chain they foster sustainable growth and help end poverty. The most valuable contribution to long term sustainability comes from the ability of extractive industries to generate benefits through productive linkages with other sectors. The International Finance Corporation (IFC) helped make this happen in Barmer, India, where we supported a Skill Development Center that trained 7,000 people to work in the operations of Cairn Energy. Not only did this training create direct job opportunities for the local population, but the acquired skills fostered the creation of an entire eco-system of small and medium-size enterprises that provided products and services to the oil company and related sectors.

When done right, developing local content around the extractive industries can transform the community and the economy. It also provides companies with a strong license to operate due to benefit sharing. But this also means the pain is shared in the downturn. Given the volatility of commodities, local businesses that work with extractive industries must always be learning to maintain their competitive edge to be a partner of choice. 

Another example of successful local content development comes from Chile, where the multinational mining corporation BHP Billiton developed the World Class Supplier Program in coordination with the Chilean government. This program prepared local suppliers with the skills to be competitive on the global stage. Now Chilean companies are not only supplying local mines, they have also positioned themselves as world class exporters.

Speakers at the event are debating many diverse viewpoints on how much governments should intervene to foster local content development, versus promoting more regional free trade. Some have asked if it might be more effective for governments to tax companies and then redistribute the revenues to support local industries, rather than extractive companies contributing directly to local economies through their business. On the other hand, we heard of examples of extractive companies that have very effectively increased competitiveness of local suppliers. Others questioned why more replication of best practices have not occurred. Is more innovation needed, or is political economy hindering further replication? 

At the World Bank Group we are advising governments and companies on what is now being called “smart policies,” ones that simultaneously attract global investment and promote local economic insertion and diversification.
I would like to add to the local content debate a new dimension that can advance climate-smart innovation by leveraging extractive industries investment in local economies. In practice this means encouraging local suppliers in developing countries to innovate and incorporate climate smart technologies into their production. Transferring climate smart knowledge and know-how to local business can fast-track sustainable development and contribute to the crucial effort to mitigate climate change impacts.

Local content is a unique win-win opportunity where coordination between the private sector, the government, and local economies can multiply shared benefits for all. Today's conference will give implementers the tools and knowledge to maximize its potential.

Comments

Submitted by Mario David Ramirez on

Excellent article and very true. Nevertheless, most mining, oil and gas dependent countries do not seem to grasp the idea that action is needed to be taken NOW...not when the reserves are already depleted.
Looonnng discussions are still being played about the importance of LC in the economy while no action is yet taken. More action and less talking is what countries need. By the time they decide on how to use this tool, their resources will be already gone!!
This is like being thirsty when there is a big glass of water in front of you, the decision of drinking the cold and fresh water is yours but it is too easy so I decide to waste time thinking and thinking if I should take it or not....by the time I make my mind I might be to weak to stretch my arm to have it.

Submitted by Hatma Suryoharyo on

I work for an energy company. Talking Local Content (LC), we use Creating Shared Value (CSV) approach. It means, we train local business to supply products and services to oil & gas project during construction phase.
The biggest challenges is who will finance the trainings? Due to principle of private sector "Money does matter". Cost for financing the trainings is not that cheap. Meanwhile government has insufficient capacity to participate into more significantly.

Submitted by Andres on

Very keen article. The importance of sthrenghten value chain at local level is a key strategy for regional development. Integrated approach combining top-down (transfer from royalties) and bottom-up (companies and suppliers promoting initiatives) strategies could trigger the development of these regions. Sounds easy, although implementing it is not. Top-down only has proved to fail so most fuel in innovations from the bottom - with for example small gov agencies specialized on it - could be the solution.

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