Local content policy formulation roars into life

Dr Gift Mugano
The Ministry of Industry and Commerce is sponsoring the formulation of the local content policy (LCP), which inter alia seeks to consolidate gains recorded under Statutory Instrument 64 of 2016 and various previous statutory instruments that were aimed at protecting the local industry.

Already, the LCP had been put under the 100 days rapid results initiative, which seeks to put in place the LCP by the 5th of December 2017. To date, the Ministry of Industry and Commerce has held a consultative workshop on the 5th of October 2017 aimed at rallying the private sector to support the development of the LCP. In the same vein, the Chronicle, a flagship under the Zimpapers Group, held a similar workshop in Bulawayo on the 10th of October 2017. The message, which came out of these workshops is that industry wants an LCP like yesterday.

The aim of local content requirements is to create rent-based investment and import substitution incentives. Local content requirements are provisions (usually under a specific law or regulation) that commit foreign investors and companies to a minimum threshold of goods and services that must be purchased or procured locally. From a trade perspective, local content requirements essentially act as import quotas on specific goods and services, where governments seek to create market demand via legislative action.

They ensure that within strategic sectors – particularly those such as minerals with large economic rents, or agriculture where the industry structure involves numerous suppliers – domestic goods and services are drawn into the industry, providing an opportunity for local content to substitute domestic value-addition for imported inputs. Thus – in contrast to the traditional protected export platform proposed by many development advocates in the 1960s and 1970s – local content requirements seek to attract foreign direct investment (FDI) by firms. Moreover, through local content requirements, government can achieve these goals often without sharing in the risk of commercial undertakings.

Local content requirements are often paired with investment incentives, as part of a “carrot and stick” approach to attracting FDI. While the use of local content measures has attracted outsized attention inside and outside the WTO, governments (both developed and developing) employ a range of measures to attract investment, using a “carrot and stick” approach.

On the “stick” side, governments use performance requirements, which can be generally understood (as defined by United Nations Conference on Trade and Development in 2003) as stipulations – whether related to local content, export performance, technology transfer, research and development (R &D), employment and domestic equity/ownership – imposed on investors, requiring them to meet certain specified goals with respect to their operations in the host country.

The specific policy goals – strengthening infant industries, increasing revenue, improving the balance of trade and lowering unemployment – are not always accounted for in the decisions of private economic agents. The use of some measures is restricted at various levels – the WTO Agreement on Trade-Related Investment Measures (TRIMs) prohibits the use of measures related to local content, trade balancing, export controls and certain foreign-exchange restrictions, and certain bilateral treaties limit the use of other performance requirements. These measures, however, are nonetheless widely used by governments to align investment with industrial planning.

On the “carrot” side, governments use a range of investment incentives to offset costs incurred by firms that choose to establish in the host market. These incentives range from direct transfers, guaranteed foreign currency – in Zimbabwean case, tax incentives, indigenisation credits, price incentives and other measures such as uninterrupted supply of water and electricity, etc.

This carrot-and-stick approach has been used successfully by several countries as an integrated package of industrial planning policies. Chile, for example, successfully used cash subsidies and local content requirements – prior to their phase-out under Chile’s WTO obligations – to develop a more diversified exporting base, with small and medium-sized enterprises in particular seeing a rapid increase in growth and export volumes.

The agro-economy of the State of Punjab successfully “revolutionised” its local contents mainly in the use of export obligation and dividend balancing measures; the Indian government has also used export obligations to develop joint ventures in the domestic car manufacturing industry. Malaysia employed a combination of “pioneer status” tax incentives with employment requirements from the 1960s through the 1990s to achieve dramatic increases in manufacturing employment – from 318 000 in 1970 to 2,1 million persons in 2000; corresponding to a doubling of its share of total employment to 23 percent and contributed to a reduction of unemployment to below 4 percent.

So, for Zimbabwe, local content is a panacea to economic woes: liquidity challenges, unemployment, balance of payment problems and export growth. Our companies say with possible linkages with the agricultural sector must start now to source their inputs from local farmers say through contract farming. This will obviously raise productivity of the sector through direct funding by cash rich companies as witnessed in the tobacco industry or farming schemes supported by Delta Beverages, Seed Co, Dairibord and Nestle. Rather than having these initiatives happening in an isolated manner, Government must have a deliberate local procurement policy aimed at making it a national requirement to support local trade.

Dr Mugano is an Author and an Expert on Trade and Competitiveness. He is a Research Associate at Nelson Mandela Metropolitan University. Feedback: Email: gmugano@gmail.com cell: +263 772 541 209

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