What prospects, instruments and challenges for African economies? Conference on Local Content Policy in the Extractive Sector in Africa Isabelle Ramdoo Deputy Head of Programme, Economic Transformation and Trade, ECDPM 21 – 22 April 2015, Nairobi, Kenya

1. What prospects, instruments and
challenges for African economies?
Isabelle Ramdoo
Deputy Head of Programme, Economic Transformation and Trade
ECDPM
21 – 22 April 2015
Nairobi, Kenya
Extractives, local Content Policies
and Industrial Development
Conference on Local Content Policy in the
Extractive Sector in Africa

2. Introduction
Part I: A reality check on local content and industrialization in
Africa
Part II: What prospects for local firms?
• Where do potential exist?
• What policies?
• What initiatives in Africa and elsewhere have worked and why?
• What instruments?
Part III: Challenges facing local firms
• Domestic and global challenges
• Legal challenges
Conclusions
Structure of presentation
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3. Part I
A reality check on local content in
Africa
Some facts and figures
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4. • Increasing recognition that extractive resources (ER) have not
been sufficiently translated into benefits overall and have not
created opportunities for local businesses;
• Debate even more important as governments are put under
mounting pressures to ensure more benefits from the ES
notably through more and better jobs and more value creation
locally
• In this context, series of policy measures and reforms
undertaken to capture more gains from ER: LCPs seen as one
way is to stimulate the domestic use of factors of production
(i) The debate: why local content matters?
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5. • No universal definition of what “local” is or what “content” means.
A multidimensional issue.
Key features
• Spatial dimension : is ‘local’ related only to the geographic
proximity of the mine or does it have a national dimension?
Experience vary (Ghana, Nigeria, Mozambique have some
requirements for local-local sourcing or employment)
• Local employment at different stages of the VC and different
competencies
• Max. local procurement and preferences
• Share of value addition and optimizing linkages (forward,
backward and lateral)
• Ownership and participation of local stakeholders (beyond the
scope of the presentation)
• Multi-purpose infrastructure use (corridors) (beyond the scope of
this presentation)
(ii). What is local content?
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6. (iii) Contribution of the extractive sector (mining)
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Source: ICMM: 2014
Contribution of the
mining sector should
not be underestimated.
Generally more
significant in terms of
FDI inflows, export and
fiscal revenues
But much less
impressive in terms
of local value added,
business spillovers
and employment
creation

7. (a) Employment: Actual job creation and potential
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Source: ICMM Reports
Case of Zambia
In Zambia, although the no. of direct jobs
increased, total number of indirect/ induced jobs
largely outweighed directed job creation (capital
intensive industry).

8. LC a stimulus to combine use of locally
extracted raw materials with
domestically available factors of
production (labour, locally produced
goods and services) to create more
value in the economy;
Must be built upon existing capabilities
within the manufacturing, fabrication
and services sector (at least in ST);
Where these capabilities do not exist,
they need to be developed, supported &
strengthened; Necessary conditions
must be created for companies to be
able to operate;
So far, in many African economies,
these conditions may be insufficient or
weak. LC definition is also not very
clear
(b) Local sourcing of goods and services
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Case of Zambia
Source: ICMM 2014
Briefcasebusinessmen

9. 1. Sources of growth varies:
More than just natural
resources;
1. But insufficient economic
transformation: share of
manufacturing declined
over time
2. Natural resources refer
essentially to raw
materials production with
little value addition.
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(c) Structural transformation
Source: Ernst and Young (2013): Africa Attractiveness Survey 2013

10. Potential is significant if policies are sustained in a systematic way overtime;
adaptive and flexible and if SS-side constraints are addressed
But significant prospects along the value chain
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11. Smile Curve
Notably in upstream and downstream linkages
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Source: Adapted from Stan Shih Smile Curve concept
Mining cluster Manufacturing
cluster
High labour,
capital
intensity
Low labour, high capital
intensity
Med to high labour and
capital intensity
< jobs but
> qualified
< jobs but
> qualified
> Jobs but
< qualified

12. ECDPM Page 12
Some e.g. of countries that have performed well along the resources value chain

13. Part II
What prospects, policies and
instruments for local firms?
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14. LC opportunities depend on the stage at which the industry is in the
mining cycle
Site construction phase is more labour intensive, but short-lived
and temporary;
Operation phase more capital intensive but with greater and more
sustainable potential for the supply of goods and services
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Source: ICMM

15. 1. In which sectors do potential exist?
ECDPM
Substantial (potential) contributions thro’ employment, skills dev’t & supply
chains. Companies spend between 40 - 80% of revenue on procurement of
goods & services (in some cases that exceeds tax & royalty payments).
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16. Mining and hydrocarbons offer different potentials
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17. Clear distinction has to be made among various types of policy
objectives:
1. Policies aimed at increasing the economic contribution of the
mine (e.g through local sourcing, employment etc). Require
different and more targeted sets of policy instruments;
1. Development of spillovers through broader resource-based
industrialization policy objectives (upstream and downstream
linkages), which may not necessarily be feasible for the mine but
possible for the country. Require other sets of policy instruments
(industrial policy, support policies to attract investment from
other firms etc).
2. Horizontal policies such as sound macroeconomic policies,
equitable fiscal policies, trade & investment policies,
infrastructure, skills development policies, R&D, financial policies
for SMEs etc.
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2. What policies?

18. In recent years, numerous countries have undertaken profound
economic reforms including on local content policies. Mix of hard
and soft policies:
In the oil and gas sector, examples include Nigeria (LC Act require
specific % of local procurement and employment requirements),
Angola (specific quota for local work force), Mozambique (non-
specific requirement for local preferences), Uganda, Ghana
(preference for locals in bidding rounds), Tanzania.
In the mining sector, e.g. include Ghana, South Africa (BEEE and
beneficiation strategy), Guinea, Mozambique (preference for local
suppliers enacted), Zambia (Mineral resource development policy
requiring preferences for local G&S although “local” is not defined).
3. What initiatives?
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19. Where have LCRs worked?
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20. LCRs have been more effective when:
1. There was the capacity to deliver and industries are competitive
(Norway in its early days for eg.)
2. They were temporary and performance-based (Norway)
3. They were flexible and adaptive (Norway, Chile, Mozambique)
4. There was a balance between regulatory measures and ensuring
the competiveness of companies
5. Initiatives are collaborative i.e where industry and government
defined together how to realistically implement objectives of
local content (Chile, Norway, Brazil, Malaysia)
Risks of LCRs being a barrier to business when:
1. Targets were too prescriptive and no or weak domestic capacity
(Indonesia, Nigeria)
2. Penalties that can cause license withdrawal (S. Africa, Nigeria)
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21. a. Hard instruments:
• Legally binding targets companies need to achieve in terms of
employment or procurement sourced locally.
• Where found? in laws, regulations, contracts, tendering
procedures etc. If not applied, may lead to fines or even
cancellation of contracts or licenses (e.g SA, Nigeria)
Soft instruments:
• Non-binding instruments seeking to attain same objective as
above.
• Where found? Policy documents and guidelines, tendering
procedures (qualified on basis of competitiveness)
Horizontal incentives:
• Instead of putting a requirement on companies, Govt sometimes
gives incentives to (domestic) companies to attain the same
goal. E.g fiscal support, financial support to develop local
industries (subsidies) or other ‘soft’ industrial policies.
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4. What instruments? hard v/s soft

22. ECDPM Page 22

23. Part III
What challenges for local
firms?
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24. Potentially: Many African economies have 2 key advantages: labour
cost advantage (although labour competitiveness may be a challenge)
and abundance of NR.
YET…. Many economies are plagued by:
• Under-industrialization; undiversified economic bases; significant
productivity gaps; skills mismatch and shortages; financial
constraints.
• Local private sector, if not informal, is weak, small and not
embedded in national, regional and global supply chains; Facing
demand-side constraints (as a result of the low purchasing power
and levels of income); Supply-side constraints due to weak
productivity which affect capacity to upgrade and expand production
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i. Domestic and international conditions matter:

25. Conditions in which business operate in many countries are fraught:
(i) the business climate is stiff;
(ii) costs of transportation are high, in particular across borders;
(iii) infrastructure and other utilities are insufficient and unreliable;
(iv) technology and skills are not adequate;
(iv) access to finance is limited, in particular for MSMEs;
(v) Insufficient skills, know-how and expertise to deliver on time,
quality and competitive price;
(vi) Insufficient support and accompanying measures for MSMEs; and
(vii) Governance challenges (corruption, mismanagement of fiscal
revenues);
Industrial policies have often been influenced by external actors,
either because countries have been advised by international
institutions (e.g. during structural adjustment programmes) or
because their policies were donor-funded, in which case the poor
alignment of strategies between donors and governments has lead to
policy fragmentation rather than coordination.
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26. Changing these conditions is essential and require:
a) Setting up efficient institutional frameworks;
b) Role of the state to support policies on a systematic basis;
c) Addressing governance issues;
d) Providing a conducive business environment to reduce costs of
doing business;
e) Providing efficient public goods – infrastructure, energy,
technology;
f) Addressing crippling effects of skills, technology, research and
innovation shortages and mismatches;
g) Managing expectations;
h) Ensure fair share of revenues, “follow the money” and manage
revenues and expenditures;
i) Striking the balance between investment and fiscal
frameworks.
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27. 1. Most LCRs would be inconsistent with WTO disciplines, unless
implemented through government procurement. Key WTO provisions relevant
to LCRs are:
1. GATT III.4: Prohibits discriminatory treatment bet. domestic & foreign
firms for like products.
1. GATT III.5. Specifically focused on LC, prohibits quantitative regulations for
use of products in specific amounts.
1. TRIMS (do not apply to services): prohibits performance requirements;
1. ASCM: Prohibits (i) export subsidies that favour specific industries (LDCs
and developing countries with GNP/capita < $1000 exempted) (ii) subsidies
linked to LC (Art 3.1b). If subsidies are combined with local content
implemented through govt procurement, they will fall under Art 3.1b)
1. GATS Art XVI: Depends in what countries have committed in their
schedules
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ii. Legal constraints

28. 2. If countries have signed BITs: contain provisions that prohibit,
condition or discourage the use of LCPs, such as:
 Establishment of joint ventures with domestic participation;
 Min. level of domestic equity participation;
 Location of HQs in a specific region;
 Employment conditions;
 Export conditions;
 Restrictions on sales of goods or services in the territory where they
are produced or provided;
 Supply of goods produced or services provided to a specific region;
 Transfer of technology, production processes or other proprietary
knowledge and R&D requirements.
 Contain ISDS provisions
3. FTAs: new generation of agreements may have even more
restrictions on use of LCPs
So far, no case brought in at the DSB at WTO on LC on extractives.
But 25% of cases under BITs are extractives related. Why?
Compensation mechanisms more favourable under BITs than in WTO.
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29. 1. No sustainable development path without industries. LCPs are key
to stimulate entrepreneurship and development of PS.
2. But not an end in themselves. Must be viewed as part of broader
industrial strategy. Importance of innovation, R&D, upskilling,
capabilities and technological transfer not to be underestimated.
3. Clear definition and objectives of LCPs is fundamental & should
be very clear: otherwise difficult to monitor results;
4. Effective LCPs require holistic approach: should be well
targeted, flexible and adaptive and need to assume politically
difficult trade-offs.
5. Successful policies pointed to the importance of a balance
between regulatory measures and the need to safeguard the
competitiveness of the industry.
6. Finally collaborative partnerships is paramount: Government is
a strong actor, but in the end, the business is conducted by the PS
and without their buy-in and support, difficult to have sustainable
results.
Conclusions
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30. Thank you
www.ecdpm.org
www.slideshare.net/ecdpm
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