Keywords: protocols, governments, companies, oil, gas
The phrase "local content" has begun to appear more frequently in the laws, internal policies and tender protocols of governments and companies around the world, particularly with regard to the oil & gas industry. The main argument to justify the local content rules is the enhancement of the local industry. But is it working?
Before analyzing the efficacy of the local content rules, it is important to understand the different approaches being adopted by different countries.
Certain countries consider a local content rule to be fully observed when a service or good is provided by a company that is owned or controlled domestically; other countries have more complex methods to calculate the percentage of good and services available in the country, by local providers.
The first model seems to fail to reach the main purpose of the ruleâ"the growth of the local industry as it does not incentivize the manufacture, or even the assembly, of goods in the country or the provision of services, locally. Rather, the model simply creates opportunities for a few individuals who will own more than 51 percent of the joint ventures to be formed with foreign entities.
The second model seems to be more realistic, and closer to reaching the main purpose of the local content rule. However, the success of its implementation is not guaranteed, as the rule itself is not enough to ensure the development of the local industry, to develop sufficient manpower or to secure competitive prices. In this article, we will focus on the Brazilian model.
The Brazilian Model
Article 171 of the Brazilian National Constitution of 1988 used to classify companies as "Brazilian companies" or "Brazilian companies of national capital," creating a clear distinction between companies incorporated in Brazil but controlled by non-Brazilians, and companies incorporated in Brazil and controlled by Brazilians.
Under this constitutional provision, any local content rule in Brazil would probably follow what we are calling "first model," according to which the definition of local content is conditioned to the nationality of the controlling shareholder of an entity.
However, with Constitutional Amendment no. 6/1995, Article 171 was revoked and companies incorporated in Brazil were considered "Brazilian companies" for all legal purposes, no matter the origin of the capital or the nationality of the shareholders (a few exceptions still exist...