Tullow, CNOOC, Total and The Local Content Dilemma.

Kampala. In my post yesterday, the case I made that Ugandan companies would not benefit immediately from the commercial exploitation of oil has been challenged. It has been suggested in private responses to my post that there would be no benefits, irrespective of the time frame and that in fact I was blowing smoke.

First off, I will repeat this here because it bears repeating, the benefits will come, most of them in the long run,  all of them as a result of local companies either through partnerships with international players or on their own initiative ensuring they meet the highest standards be they health and safety, be they accounting standards. The point here is simple; doing business with local companies must not carry with it a liability that extends far beyond any commercial gains. The other side of this argument is, local companies should not expect to benefit simply because they are local companies.

The interconnected nature of international business and the increasing demands being placed on large multinational companies with extended supply chains can best be illustrated by the following story. In 2010, Domini a US based investment firm reached an agreement with Nucor, the largest steel producer in the United States in which the Nucor committed to regular monitoring of its suppliers to ensure that none of its suppliers used slave labor in the process of making pig iron a key component in the manufacture of steel.http://www.ilo.org/sapfl/News/lang--en/WCMS_143438/index.htm

This agreement was brought on by an investigation by Bloomberg Business week Magazine that revealed the use of slave labor in the manufacture of charcoal, a key component in the manufacture of pig iron. The pig iron was sold to Nucor which in turn sold it to car manufactures.  http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a4j1VKZq34TM.

The interest that this issue generated also forced the car manufactures Ford, General Motors, to commit to ensuring they would not source products from vendors who have questionable business practices. The actions of one, maybe more individuals in Brazil had affected decisions in the corporate boardrooms of blue chip companies in New York, and Detroit.
 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=arPjegyeQ7ik

The foregoing is an illustration of how interconnected the world has become, how what in a past life may have been a local incident now has far reaching consequences. Nucor simply bought goods from its Brazilian suppliers, some may argue Nucor cannot be held responsible or punished for actions of a legal entity it does not control. That may have been true in the past, today that argument holds no water, multinational companies can no longer afford to slack off with respect to their choice of local partner, as the foregoing illustration shows; the costs of local noncompliance can be very steep commercially.

Bringing it home, while there may be a great deal of hoopla about Tullow and their choice of local partner, local businesses need to address themselves to the question of compliance standards across the board. Health and safety, labor, accounting, etc as a lapse in these areas could have deleterious effects on Tullow both commercially and in terms of reputation.   

Tullow, CNOOC, Total are duty bound to enforce their highest group standards with respect to vendors and local partners. They are also required to transfer as much skill and knowledge as they can to the local business community through. For local companies seeking to become regional and maybe even international players  they cannot expect a free ride,  it is important that compliance to the highest standard be they health and safety, be they accounting standards be seen as a requirement rather than an inconvenience. That is the new cost of doing business on the international scene.