In 2018, IGF released a Guidance to the attention of governments on the design of local content policies. The Guidance provides the key steps that are necessary for effective policy design, and highlights the necessary pre-requisits that need to be in place for successful policies. Key instruments of local content are also highlighted. The Guidance is informed by case studies of successful and failed policies.
Chapter 2.ppt of macroeconomics by mankiw 9th edition
Local Content Policies for Mining Sector
1. Secretariat hosted by Secretariat funded by
IGF GUIDANCE FOR LOCAL CONTENT POLICIES
AN OVERVIEW
Isabelle Ramdoo
October 15, 2018
IGF Annual General Meeting, 15 – 19 October
2018
Geneva
2. Introducing the local content guidance
Aim: Support governments in making informed decisions when
designing local content policies
Help policy makers ask the right
questions
Guidance recognize context-
specific nature of challenges
Target of Guidance: policy makers, industries, financial agencies,
development agencies…
3. How should the Guidance be used?
A step-by-step approach designed to ensure all the necessary conditions are
in place, so Governments can design, implement and monitor local content
policies in an efficient manner.
Each step is a critical building block to
the successful implementation of LCPs
Step 4 can lead to a review of the policy
and go back to step 2 and 3 again (a
virtuous circle)
4. 1. Clarify role of the mining sector in national (regional, local) development
plans (scope will differ depending on type and amount of mineral reserves; if
country is a nascent producing or a mature producing state etc..)
STEP 1
2. Clearly define objectives
government wants to achieve:
ü Each objective calls for
different mix of policies
ü May be trade-offs between
policy outcomes
ü Helps manage stakeholders’
expectations
5. STEP
2
ü Provides strategic questions to guide governments in getting a
deeper understanding of the context in which mining operates
ü Outlines key strategic considerations to appreciate current
opportunities and address future challenges
ü Puts forward the key pre-conditions that need to be in place
ü Guards against possible risks and likely potential consequences of
ill-designed local content policies
•Industrial capabilitiesþ
•Human resource
capabilities
þ
• Business
environmentþ
•Internal capacityþ
6. STEP 3
Provides guidance for Governments to decide what sorts of tools are available
(and would most suitable) within each of the 5 types of local content policies
Local procurement
Direct employment
Downstream processing/
beneficiation
Horizontal linkages Local ownership
30 case studies highlight successes and failures from international practices
7. STEP 4
Designing a policy is not an end in itself.
ü It must be administered;
ü It must be enforced;
ü Progress must be measured against realistic targets
ü Should include an independent review function
The Guidance provides key elements to put in place an enforcement
and review mechanism
9. Getting the objective and definition right
Purpose: increase the local sourcing of goods and services by mining firms
Why it matters: Increase contribution of mining to economy; gateway for
diversification; provide business opportunities for local firms; socially inclusive
(include indigenous/ marginalized groups); good for taxes
Clear definition of local is key. Guidance highlights three common elements to
consider:
q Geographical coverage: proximity to the mine? National?
q In-country value addition
q Ownership of firm’s equity
10. Taking stock: Key considerations
ü Comprehensive understanding of needs of mining firms
now and in the future
ü Size of the market (at home; regional; international)
ü Mining contracts: how easy can local suppliers access
those?
ü Industrial base: Suppliers’ availability and ability to meet
requirements
ü Institutional support: are there incentives to help local
suppliers? Infrastructure?
ü Business environment: access to finance? Administrative
bottlenecks?
Demand-side
Supply-side
11. Policy options and instruments (1)
1. “Hard” regulatory measures:
Option 1: Mandatory targets : Percentage or quota imposed for the sourcing of goods and services from local suppliers
Option 2: Mandatory list of types of goods and services to be sourced from domestic firms
Option 3: specific sectors reserved for national
Option 4: Community development agreements: Requirements for companies to negotiate with local communities (can
range from general principles to legally binding agreements with grievance mechanisms)
2. “Soft” regulatory measures
Option 5: Best effort obligations to give preference to local suppliers (to the extent possible) to the extent local
firms are competitive with foreign competitors. Government may also set percentages for preference
procurement in bids, if local suppliers are within a certain percentage on price
Option 6: Mandatory requirements to provide local procurement plans and submit annual reports including how
much they procure locally
Option 7: Requirements to set up suppliers portals, online database for contracts/ tenders; post all tenders
(sometimes can be led by mining companies)
12. Policy options and instruments (2)
3. Incentives
Option 8: Supporting suppliers’ development programs
Types of instruments: Incentives and programs to develop capacity of suppliers (access to markets; finance;
skills development; mentorship etc.) Can be driven by firms
Option 9: Provide access to finance
Types of instruments: Special guarantee funds for SMEs; concessional loans; companies to provide supply
arrangements as bank guarantees; training of SMEs financial management
4. Partnerships and building internal capacity
Option 10: Building suppliers’ networks through requirements to unbundle contracts; give longer timeframes to
SMEs; train suppliers in tender process; give score preference to locals etc.
Option 11: Initiatives led by mining companies to develop local supply chains; support local economic actors
in meeting technical standards and requirements for procurement; companies to provide expedited
payments;
13. Options highlight strengths, weaknesses and success factors
Example: Mandatory target percentage for local procurement
Strengths Weaknesses Key elements of success
• Sets benchmarks and acts
as a target-setting
exercise between govt.
and industry
• Can be a driver for
industry’s action
ü Target setting often arbitrary, if not informed by
procurement data; ability of suppliers; market
analysis
ü Arbitrary setting is a risk for both gov and co.
Too low targets lead to insignificant impact; too
high targets affect competitiveness of firm
ü Mandatory targets can introduce distortions
and inefficiencies and invite cheating
ü Quantitative rules are incompatible with
international trade rules
ü Consultations with industry and
suppliers;
ü Measures should be time-bound;
and phased over time if local
capacity is limited
ü Monitoring and enforcement
ü In-build flexibility, to allow for
unforeseen circumstances
15. Getting the objective and the definition right
Purpose: enhance the amount and quality of local employment by mining
operations
Why it matters: create new local jobs; grow and develop skills of local
workforce; support efforts for social inclusion and gender equality
Clear definition of local is key. Guidance highlights main parameters to
consider:
Geography: Close to the mine? Residents and citizens
of the country?
Ethnic or social sub-groups: indigenous and
historically disadvantaged groups; gender equality.
16. Taking stock: key considerations
Demand-side considerations
ü Understand various skills and
competencies required by the mining
sector
ü Timing and quantum of labour force
requirements
Supply-side considerations
ü Does the current education/ training
system responds to demand?
ü What gaps are there in local labour
force?
ü Set up dedicated support to training
institutions in partnership with industry
ü Be aware of future needs of firms
Key stages for developing a local employment policy
19. Getting objectives and definition right
Definition: encourage economic diversification within the mining sector
by fostering processing or value addition, using the proceeds of the
mining industry as inputs for manufacturing.
Objectives: positive spillovers on domestic national income through
more jobs; more taxes; improved trade balance; more gains from sales
of outputs (incl. higher export revenues). Can also be for national
security concerns (e.g. petroleum; steel; critical raw materials)
20. Taking stock: Key considerations
Economics of downstream
linkages is complex:
ü Availability of raw
materials is not a
sufficient condition;
ü Cost factors are key
determinants (e.g.
energy; infrastructure;
IT; trade regimes);
ü Capacity to produce
on a large scale can
be an advantage;
Market demand: Some downstream industrial sectors require large capital investments and long
repayment periods. Investors therefore need sufficiently large and stable markets, which can be domestic
or international. If those cannot be guaranteed, downstream investors are likely to move closer to the
consumer markets rather than to raw materials-producing countries
A suitable location and good infrastructure: For high-volume goods such as steel, there must be
adequate transportation infrastructure, and for those goods that will be exported, a suitably large
port with storage facilities. Location is critically important to heavily traded goods and being on a
major trade route is an advantage.
Reliable and inexpensive energy: In many cases, power consumption can constitute a major
share of operational costs. The success of downstream projects, particularly energy-intensive
ones such as aluminium smelters, is linked to reliable and inexpensive energy access.
Political stability and regulatory predictability. From an investor's perspective in the downstream
sector, a stable political climate and government's support over the lifespan of the project is
critical.
Business environment and competitive labour force: A conducive business climate yields a lower risk
premium and increases investors' confidence in the business environment in which they will operate.
Similarly, quality of the labour force and output per worker are key determinants in an investor's analysis
about a country's competitive advantage.
Success depends on critical pre-requisites
21. Policy options and instruments
•Tax reductions/exemptions
•Energy or water subsidies
•Concessional loans
•Providing industry-specific infrastructure
•Tax reductions for upstream regimes
•Tariff on imports
1. Incentives
•Export restrictions
•Domestic sales requirements
•Licensing requirements to control ownership structures, number of firms involved in extraction
•Trade-balancing measures
•Market reserve policies
•Import duties to protect local production
2. Prescriptive
measures
•Downstream processing imposed in contract negotiations; renewals; or re-negotiations3. Negotiations
•Domestic sales requirements
•Developing downstream facility as a condition for contract award
4. Bidding
process
•Governments to invest downstream to produce/manage/sell value-added products5. Government-
led policies
23. Getting objectives and definition right
Definition: Defined as policies to stimulate the development of other, or new,
economic sectors using skills, capabilities and infrastructure from the mining industry.
Aim: diversify and reduce reliance on mining sector; insulate economy against price
volatility; set stage for economic vitality after mine closure; create spillover benefits.
Horizontal linkages can be developed through two channels:
Infrastructure-led linkages
•Develop when infrastructure built for the resource sector
benefits another productive sector and the
national/regional community.
•Requirements to build multipurpose infrastructure may
impose additional costs on the affected operations.
•Negotiations over ownership, maintenance, cost sharing
and risk sharing are complex, and more so when more
than one country is involved.
Capabilities-led linkages
•Develop from upstream linkages, as inputs, technology or
skills developed in supplying the resource sector are then
used elsewhere, through the adaption of core extractive
industry;
•Develop through non-core capabilities obtained to serve the
extractive sector, which are then applied to the rest of the
economy.
24. Taking stock: Key considerations (1)
When considering infrastructure-led horizontal linkages:
National and regional
development plans
•Consider what priority infrastructure investments are aligned with existing national and regional
development planning
The sectoral context
•Appreciate the willingness and ability of mining company(ies) to invest in shared infrastructure, given the
probable increase in costs and the governance complexities.
• This will be a function, among other things, of companies’ current needs for the infrastructure in question,
the richness of the resource endowment and the profitability of the existing operations.
25. Taking stock: Key considerations (2)
When considering capabilities-led infrastructure linkages
Upstream
linkages
•The more robust the existing web of upstream linkages, the more fertile the ground for capabilities-led horizontal linkages.
• If upstream linkages are weak, then the primary focus should be on strengthening them.
•It may be possible to develop some horizontal linkages in parallel to developing upstream sectors, for example via supplier
development that includes training on generally useful business skills.
Domestic
human
resources
capacities
•The pre-existing knowledge/technology level within the economy (referred to as the absorptive capacity) is a key determinant of
the potential for spillovers
•Acquisition of knowledge & technology adaption will be determined by the level of education and technological know-how.
•This must be combined with some level of entrepreneurial drive and managerial competency.
Attractive
investment
environment
•The business and investment climate is particularly important to encourage and reward risk taking and innovation, and to enable
enterprise development.
26. Policy options and instruments (1)
Capability-led horizontal linkages
Option 1: Training of suppliers aimed at serving diversified clients
Types of instruments: Training requirements with specific focus on business administration and
management skills; Requirements to provide clear plan to develop strong supply chains;
obligation to make financial contribution to fund training programs
Option 2: Incentives to develop national systems of innovation
Types of instruments: Incentives from Govt to create NIS through network of research and
academic institutions; govt act as coordinator, financial supporter and regulator; incentives for
R&D in form of grants and tax incentives; govt to facilitate domestic patenting through
improved IP rules
27. Policy options and instruments (2)
Infrastructure-led horizontal linkages
Option : Negotiations and/or requirements for construction of shared infrastructure
Types of instruments:
q Mining companies required to build/ share infrastructure as part of licensing bidding
process;
q Obligation to partner with in design of mining infrastructure;
q Fiscal incentives given to mining companies for as part trade-off for building and
sharing infrastructure;
q Requirement for financial participation in public infrastructure projects
29. Getting objectives and definition right
Definition: Building domestic capacity means increasing national participation in mining
activities, through:
ü Increased ownership from the private sector;
ü Increased government participation in management
ü The creation and expansion of state-owned companies
Increased domestic capacity responds to the following policy objectives:
A strategic instrument
• Aims to provide substantial support to
build strong national champions
(domestic firms and SOEs) so that the
latter can "go global" to meet domestic
goals of securing access to raw materials
for their own industrial development
•E.g., China, Japan
Industrial development
• Key purpose is to build solid internal
capacity, notably through transfer of
knowledge and technology from foreign
investment, and increased participation
of local people in companies' decision
making.
•E.g., Norway (technological transfer)
•South Africa (increased management)
Empowerment tool
•Aims to correct historical and
socioeconomic imbalances, including
among certain local population groups
and indigenous populations as well as
women and youth.
•E.g., BEEE policy in South Africa; Citizens
Economic Empowerment in Zambia
30. Taking stock: Key considerations
When aiming at increasing the
participation of the private sector,
attention must be paid to:
ü Local businesses have the requisite
capacity (financial, technical,
managerial etc.) to partner with
mining companies;
ü Supportive institutions and incentives
are in place to help build capacity
of local entrepreneurs;
ü Business environment is conducive
for partnerships to work
When aiming at increasing the participation
of SOEs, attention must be paid to:
ü The risk of rent-capture, corruption and
patronage;
ü The importance of governance to ensure
transparency, accountability; regular
reporting;
ü Mechanisms to avoid political interference
and ensure company’s ability to operate
commercially;
ü Coordination with other policies such as
trade and investment to create good
conditions for production
31. Policy options and instruments
Option 1: Joint venture requirements
Instruments: Mandatory requirements for increased domestic participation through equity
participation; substantial control through board and management representation; skills
transfer; Incentives to make JVs more attractive;
Option 2: Stimulating technological transfer and R&D
Instruments: Obligation to bring in technology; R&D in country as a condition for a financial
benefit such as tax breaks; incentives to partner with local universities to conduct R&D;
Option 3: Creation and promotion of SOEs
Instruments: SOE as a monopoly over exploration/ production; Policies to limit entry of FDI in
some sectors or to expropriate existing FDI.
Option 4: Measures to increase the participation of disadvantaged groups
Instruments: ownership requirements aimed at specific groups; direct support to
disadvantaged groups
32. How can IGF support implementation of the Guidance?
Guidance was requested by, and belongs to members
1. What are your priorities for the next step in terms of:
(i) Training on the how to use the Guidance: in-country and/or regional
training;
(ii) Technical support and capacity building activities to address your
current challenges?
2. How would you like to this Guidance used in your country and/or region?
33. 3. What types of TS and CB would you like to see or would you find
more useful?
Ø Assessments of needs and gaps? (could be part of MPF
assessment)
Ø In-country tailor-made support (issue based? Based on specific
objectives? Focused on specific challenges?)
Ø Working with regional organizations on cross-cutting issues?