Local Content Policies in the Oil and Gas Sector

Table 3.8 Indonesia: Summary of Price Preferences Based on Local Content (LC) Level and Company Status Category

Minimum LC

Goods

25%

Company status

Other requirements

Price preference

Any

None

A maximum of 15%

Proportional to LC

Domestic

None

Additional 2.5%

Flat

Any

None

A maximum of 7.5%

Proportional to LC

 At least 50% of the service is Additional 7.5% performed by a Domestic Domestic acting as Company; and a lead of a  At least 50% of the service is Additional 5% consortiumb carried out in Indonesia Domestic

Services

30%a

Schedule

Flat Flat

Source: Based on data from BPMIGAS 2011c. Note: (a) Promise/commitment to achieve 30 percent; (b) Consortium with national company that has a status of foreign investment and/or with foreign company.

The local-content-related price preference (Pb) is applied on the direct production cost of the goods (HPb). For instance, the price preference does not apply on the transportation and handling component of the cost (TH). As such, the evaluation price reflecting the price preference for local content is expressed as:

EP L C 

1 HP b  1  Pb

As for the company status price preference (PSp), that is applied on the total cost components, which includes a noncost component (NC). To this end, the bid evaluation price (BEP) can be defined as:

BEP

1 EPL CTH NC 1 PSp

An example for the evaluation of a bid price in comparison to the contract value is presented in Table 3.9. Table 3.9 Indonesia: Example of Calculating a Bid Evaluation Price for the Supply of a Good Component A Direct production cost (HPb) Transport and handling (TH) Total cost components Company status Noncost component Total

Local Content Contract Value ($ Mn) Value ($ Mn) % B c d=c/b 25.00 7.00 28.00% 1.50 26.50 Manufacturer has domestic company status (55% of shares owned by Indonesian) 2.00 28.50

Price Preference % f=d*15% 4.20%

2.50%

BEP ($ Mn) g 23.99 1.50 25.49 24.87 2.00 26.87

Source: Based on data from BPMIGAS 2011c.

Suppliers can gain a value of appreciation on the local content level achieved, called BMP, in case a company’s investment in Indonesia is directed toward the development of a domestic industry. BMP allows PS contractors (through their suppliers and service providers) to increase the level of achieved local content by up to 15 percent. As shown in Table 3.10, companies can gain a BMP through four activities. Each activity has defined criteria that are translated into weights applied on the maximum BMP level of 15 percent. A maximum weight limit applied also to each activity (BPMIGAS 2011c).

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Local Content Policies in the Oil and Gas Sector

Published on Apr 24, 2013

World Bank Publications

A number of countries have recently discovered and are developing oil and gas reserves. Policy makers in such countries are anxious to obtain the greatest benefits for their economies from the extraction of these exhaustible resources by designing appropriate policies to achieve desired goals. One important theme of such policies is the so-called local content created by the sector—the extent to which the output of the extractive industry sector generates further benefits to the economy beyond the direct contribution of its value-added, through its links to other sectors. This paper provides a detailed description of the policy context, objectives, implementation tools, and metrics used in a select group of petroleum-producing countries, including Angola, Brazil, Indonesia, Kazakhstan, Malaysia, and Trinidad and Tobago. The information is further analyzed in the paper on Local Content in the Oil and Gas Sector, World Bank Studies, Washington D.C., 2013.