With forecasts that the total GDP of emerging markets could overtake that of the developed economies by 2014,1and at a time where technological advances are transforming the energy business globally, it is easy to see why emerging market energy project explorers and developers (EMEPED) are so excited about their prospects. Since the advent of the global commodity boom in 2000, many emerging markets have experienced substantial growth the growth, creating tremendous potential for investors with long-term investment horizons. At the same time, investing in emerging markets has become increasingly more complex and challenging. One of the emerging market risks expected to become more difficult to manage in the coming years will be the labor challenge.
The demand for highly skilled, highly educated and a highly experienced workforce to implement energy projects is intensifying, and leading to labor shortages in developed economies. Such shortages are amplified in many emerging markets where a workforce skilled in energy matters is often non-existent. Expatriated employees are often utilized to help lift projects off the ground in such markets, but are not always be able to satisfy all such labor demands. Without sufficient skilled labor, risk of an adverse health, safety or environmental incident increase substantially. Going forward, an EMEPED’s success in an emerging market will depend upon its ability to solve labor constraints.
Going Local – Local Content and Local Counsel
Local content is generally thought of as the requirement that a project funded by foreigners generate value for the host country’s economy with the intention of promoting growth, creating local employment in the host country and keeping wealth within the host country’s borders. Many local content regulations require up to 30 percent of the workforce consist of local labor.2 In an era where energy companies in developed economies face manpower shortages, satisfying such local content regulations can be daunting. Running afoul of such requirements (whether by an EMEPED’s contractors or otherwise) can lead to monetary damages, nationalization of an EMEPED’s assets in the host country, and rescission of all grants, licenses, and contracts from the host country.
Many of the emerging markets which have caught EMEPEDs’ interest are in regions with little history of significant oil and gas production and thus there was never any demand for universities in such markets to offer energy related professional training programs. More troubling, given the age of the current skilled energy workforce in developed economies, there is growing concern that the industry will lose a significant portion of its skilled workforce to retirement within the next ten years, making the skilled labor shortage even more pronounced at a time when many large scale energy projects now on the drawing board will come on-line.
EMEPEDs should take steps early in a project’s life cycle to determine how labor needs will be met. This requires developing a clear picture of the number of local employees needed for a project and the type of skills required. A good place to start is hiring knowledgeable local counsel (more on local counsel below) in the host country who can advise on specific local content rules, as well as on the complexities around employment laws, local benefits and employee taxation matters. In some emerging markets, local content obligations can be met through the employment of local labor forces in ministerial or unskilled positions, thus, allowing EMEPED’s to rely, to a greater degree, on the host country’s labor pool to satisfy local content requirement. Beyond local counsel, EMEPEDs should reach out to universities in the host country/region for recommendations on how to obtain the requisite skilled labor. Reliance on service companies to assist in resolving the labor shortage is another path EMEPEDs often chose to solve labor matters, but in doing so, EMEPEDs incur additional risks and such arrangements do not always provide a safe-harbor for the EMEPED from a host country’s claims of non-compliance.
On the other hand, hiring local counsel, a company’s advising attorneys on the ground and licensed in the host country, can often feel like hiring a tour guide for an new adventure – there’s often an infinite supply of willing parties, a lack of good information on satisfied (or unsatisfied) customers, and a range of prices that is rarely directly proportional to the quality of the service provided. But like the tour guide, the right (or wrong) local counsel can be the difference between an efficient, properly managed venture and a laborious, painful headache with potentially disastrous consequences.
The first step in hiring local counsel is working with the company’s most trusted domestic counsel and asking for recommendations. Many large commercial law firms have offices all over the globe and even if they do not have an office in the project country, they may have an office in a surrounding country or on the same continent. This can mean familiarity with the government institutions and how they interact with foreign investors, personal relationships with skilled attorneys in the host country, and a general understanding of the legal complexities that exist in a particular emerging market. If the domestic law firm doesn’t have an office near the project country, the firm will likely be able to provide a referral for competent local counsel.
Good local counsel will make the process of complying with local content laws more efficient and more transparent. Companies should reach out to local counsel as early in the investment decision making process as practicable, and should be clear and communicative with local counsel throughout the life of the project.
Expatriates in Emerging Markets
EMEPEDs have long relied upon the expatriate employee to lead projects in emerging markets because, among other things, such expatriates are trained in the EMEPEDs manner of conducting business and ingrained with the EMEPEDs safety policies facilitate managing the local labor workforce. According to a recent Mercer’s survey, two of the most significant challenges for EMEPEDs in attracting expatriates in emerging markets are (1) establishing competitive policies for attraction and retention and (2) addressing equity issues between expatriates and local nationals.3 Skyrocketing salaries for petroleum engineers in a developed economy such as the US clearly lead to even more substantial compensation package demands from expatriates. Such larger compensation packages create a wider gap between expatriate compensation and local labor compensation, often driving an even deeper wedge between these two groups. Moreover, with skyrocketing global travel costs and rapidly increasing costs of living in emerging markets (e.g., Luanda, Angola was recently considered the most expensive city in the world4), funding an emerging market energy project with as many expatriates as possible is often very difficult and uneconomic.
Another major challenge identified by Mercer’s is attracting the right expatriate candidate. An EMEPED’s failure to attract the right candidate and then properly prepare, and manage, that candidate for emerging market work can be costly. Expatriates often encounter unique challenges in a host country and failure to attract suitable candidates, and prepare such candidates for working in a host country can become a significant issue (e.g., FCPA violations or reputation damaging cultural clashes between expatriates and local labor). Proper management requires careful screening of potential expatriate employees to make sure the right candidates are relocated. Candidates being considered for offshore assignments should be educated with respect to the history, current affairs, and political situation of the host country, and careful planning with respect to the employee’s family or personal situation should be undertaken. Failure to do so can lead to higher turnover and greater costs.
By (i) knowing and complying with local content regulations, (ii) carefully evaluating labor needs and the local skilled labor market, (iii) identifying and working with competent local counsel, and (iv) utilizing, preparing, and managing a project’s expatriate labor force, an EMEPED can mitigate its labor risk and increase the probability of success in its next emerging market investment.
2 See Accenture: Developing Local Content Programs; Insights from Accenture for global players to achieve high performance in today’s competitive energy landscape.