- By William Nozaki and Rodrigo Pimentel Ferreira Leão
This week, the National Agency of Petroleum, Natural Gas and Biofuels (ANP) held a Public Hearing to compile subsidies in order to edit a “regulatory act that will regulate the criteria, requirements and procedures applicable to the Exemption from compliance with the Local Content obligation, as well as the general rules of the Adjustments of the Percentage of Committed Local Content and of the Transfers of Surplus of Local Content, related to the Concession Agreements from the Seventh to the Thirteenth Bidding Round, of Onerous Assignment and of the First Round of Production Sharing of the blocks exploration of oil and natural gas”.
This public hearing is one more step in the process of changes in the regulatory acts for Local Content (CL) proposed by the ANP. At the end of June, the agency released Technical Note 01/2017, which explains the reasons and the wording of the draft Resolution establishing the possibility of Exemption from complying with the Local Content obligation, as well as the general rules of Percentage Adjustments of compromised Local Content and Surplus Local Content Transfers in the aforementioned rounds.
Although the ANP Technical Note n. 01/2017 recognizes that the current local content policy strongly influences the previous investments made by Brazilian suppliers to meet future demand, the ANP claims that there are three “most relevant” reasons for structuring a rule that authorizes the exemption, adjustment or transfer of the realization of local content, previously allowed only as exceptional cases. The ANP claims that these changes would be necessary given the following reasons: 1) the trivialization of compliance with established local contents would be weakening the induction of demand originally thought; 2) the large number of requests for exemption would point to its use in a distorted way, a fact that caught the attention of the ANP and the Federal Audit Court (TCU); and 3) the difficulties faced by operators to reach the percentages established in view of the crisis faced by Brazil.
The draft presented does not determine what would be too long a period for Brazilian suppliers to be “replaced” by foreigners.
Based on these premises, the ANP presented a draft of the regulatory acts of the CL that allows operators to request exemption, adjustment or transfer of content based on the following criteria: i) overprice or excessive time to meet operators' demands and; ii) existence of new technologies in the market and internationally. However, the way in which the draft was constructed allows cases considered to be exceptional to be generalized. That is, in practice, what is proposed is a liberalization of compliance with the minimum percentages of local content.
This is because, in the first place, the draft presented does not determine what would be too long a period for Brazilian suppliers to be able to be “replaced” by foreign ones, as well as disregarding the deadlines of after-sales services (and of the entire production process) in the analysis. ) which can be much faster if served by local producers than by foreigners[4]. And, secondly, it ignores the existence of a myriad of technologies in the sector, as well as the very process of operating the technical process – which requires prior capacity and the development of know-how for its development. The existence of an immense list of technology in this sector imposes a great difficulty to be specified in legislation. That is, given the volume of technology in the oil sector, there is great difficulty in specifying which technologies can enable a company to waive compliance with local content.[5]
However, even if all these pending issues were resolved, the draft poses serious legal and economic risks in relation to the development of the oil and gas chain, including its suppliers.
On the legal issue, by redefining the minimum percentage of local content in auctions already held, the institute of acquired right is violated, guaranteed in article five of the constitutional text and elevated to the stony clause in article sixty of the same document. No sectoral regulatory framework has a legal license to arbitrate regulations that overlap or that go against the maximum code of our law, which is the Federal Constitution of 1988.
By trying to apply a retroactive change to contracts already signed, the new ANP regulations violate acquired constitutional rights and set precedents for the establishment of legal, regulatory and institutional uncertainty. The new guideline for flexibilization and shrinkage of the local content policy cannot serve as a pretext for creating an environment that violates legal certainty in relation to contracts already made. Such a measure weakens the institutional framework of contracts executed in this sector.
On the legal issue, when redefining the minimum percentage of local content in auctions already held, the institute of acquired right, guaranteed in article five of the constitutional text and elevated to the stony clause in article sixty of the same document
On the economic issue, the ANP Technical Note 01/2017, although it makes a brief reference to the topic, does not deal with the role of local content policy in the long term with due care, since such a policy has a structural function to mitigate the risks of economic growth based on natural resources. . The increase in foreign exchange, resulting from exports of natural resources, causes a strong appreciation of the national currency which, combined with the lack of incentives for the development of local industry and, consequently, reduces the competitiveness of the national manufacturing industry, reducing the capacity to generate employment. and local technical progress. This can be mitigated or reversed through the use of industrial and local content policies.
International experiences even point out that, soon after large oil discoveries, countries should use such policies as a way of organizing the incipient oil industry along with other production chains.[6]Even if there are possible initial inefficiencies, such policies are crucial to consolidating new industrial sectors in the long term. In other words, obviously, this process is not fast and automatic, being necessary, at first, to support a certain degree of “inefficiency”. This policy generally implies, at the beginning, a surcharge and more elastic terms in exchange for the development of the national industry. However, overpricing and lead times tend to be reduced over time with economies of scale (reducing unit costs) and technological development in the production environment.
Instead of being an exception, now the exemption, adjustment and/or transfer of local content become a rule, which should induce the importation of equipment, machines and technology to meet local demand
More serious, if this does not occur, there is a risk of establishing a growth based on natural resources that, over time, generates progressive disincentives for the development of other industrial segments. The abrupt interruptions of this type of policy make it impossible to create technical progress and the development of new production chains in the long term, and generate a strongly negative cycle in project investments in the medium term.
Instead of being an exception, now the exemption, adjustment and/or transfer of local content become a rule, which should induce the importation of equipment, machines and technology to meet local demand. In the case of technological import, these changes do not stipulate any transfer condition (from foreign technologies to the country) and, much less, preserve the clusters already formed in the country between universities and companies. In this way, one can observe a complete dismantling of these clusters and prevent the expansion of the production and technical chain in Brazil.
Therefore, the current change suggested by the ANP, in addition to presenting intrinsic flaws in the proposed regulation itself - in terms of deadlines and new technologies -, deals in an irrelevant way with the legal uncertainty that may emerge in this process, as well as a demobilization of the investment chain. of oil and gas suppliers. While countries like Norway, England and South Korea used these policies for decades creating major global players, in Brazil, the setback prevents any more serious evaluation of a policy still in its infancy.
*Willian Nozaki is a political scientist, economist and professor at the Fundação Escola de Sociologia e Política de São Paulo. Rodrigo Pimentel Ferreira Leão is an economist, having worked at the Institute of Applied Economic Research (Ipea).
[1] The authors are grateful for the contributions of Paola Azevedo, doctor at the Federal University of Santa Catarina, and of DIEESE economist, Cloviomar Cararine. Any errors and omissions are the sole responsibility of the authors.
[2] Master in economic development (IE/UNICAMP). He was planning manager at the Petrobras Social Security Foundation (Petros). He is currently a researcher at the Celso Furtado / FESP-SP Chair and a member of the Strategic Studies and Proposals Group (GEEP) at FUP.
[3] Professor of Political Science and Economics at the School of Sociology and Politics Foundation of São Paulo (FESPSP) and member of the Strategic Petroleum Studies Group (GEEP) at FUP.
[4] The draft of new legislation proposed in Technical Note 01/2017 by the ANP, in its article 3, states that “the ANP may (…) authorize the exoneration of the Local Content commitment, in relation to the contracting of a certain good or service , in the event of (…) proposal from Brazilian suppliers with excessive delivery times in relation to non-Brazilian counterparts”. In article 5, the ANP details how the exemption from compliance with local content is applied in the event of excessive delivery times being verified: “the hypothesis of excessive time (…) will be analyzed by the ANP according to the characteristics of the contract, and the Operator demonstrates in its order that the difference in delivery times between the Brazilian supplier and the foreign suppliers compromises the proposed activity schedule”.
[5] The 2017 and 2016 ANP Innovation Awards (finalists and winners) and the research carried out by Lloyd's Register Energy's Oil and Gas (supported by the Brazilian Institute of Biofuels), for example, point to the extensive volume of technologies developed in the last period within the oil sector.
[6] However, there are alternatives for facing these challenges and they depend heavily on state action: “all these problems can (theoretically) be avoided if comprehensive economic and industrial policies are introduced (…)”, as the UFRJ professor recalls, Carlos Medeiros in his article Natural resources, nationalism and development strategies. Analyzing the different countries that have competitive advantages in certain natural resources, England and Norway stand out as successful cases in terms of productive diversification and technological progress through economic and industrial policies, whose local content policy (LC) and its changes have a central role.
