Issues in designing local content strategies in host countries

Samuel GayiSpecial Unit on Commodities, UNCTAD

VI Workshop on Development challenges and Policy options for managing the extractive sector

26-26 April 2013, Dar es Salaam

I. Why local content strategies are important for host counties?

II. Devising local content strategies: some key issues

V. Recommendations

Structure of Presentation

Positive impact:

• Generator of export revenues and foreign exchange;

• Major source of government income; • Positive economic externalities through

vertical and horizontal linkages (?)

Economic Impact of Extractive Industries

on Host Countries

Economic Impact of Extractive Industries

on Host Countries

Potential negative impact:

• "Dutch disease" symptom;• Government budget planning and investment

decisions highly destabilized by excessive price volatility;

• Weak linkages with the rest of economy and failing to capture positive economic externalities

• Limited direct contribution to employment.

• Intrinsic characteristics of extractive sector activities: capital-intensive, low employment, higher technical barrier, higher requirements for qualifications and labour skills, weak linkage with the rest of economy.

• Local content strategies are of prime importance to increase employment, capture positive economic externalities and maximize the economic benefits made by the extractive industries in host countries.

Why Local Content Strategies are Important for Host Counties?

Definition of Local Content

• Local content can be defined in different ways but a common denominator is value addition in the host country economy.

• A comprehensive definition is “a set of deliberate orientation and actions to build domestic capacity relevant for service and product delivery comparable within that industry.” (Obuaya, 2005).

Mining value chain

Smelting & Refining

Exploration Development Mining MineralProcessing

Value Addition

Transport & Storage

• Political and macroeconomic stability;• Human capacity building, including

education, in particular technical and vocational;

• Infrastructure development;• Industrial base; and• Governance.

Devising Local Content Strategies: Some Key Issues

• Prudent fiscal policies; • Realistic exchange rate policies; • Adequate external borrowing (?);• Diversification of the economy to

expand the tax base;• Establishing stabilization funds to

smoothen budget spending over the boom-burst cycle.

Political and Macroeconomic Stability

1. Develop a general educational base• Government should strengthen the educational and training

base by providing sufficient resources and proper education facilities.

2. Facilitate local workers’ participation in the extractive value chains

• Developing R&D programmes/funds/specialized institutes (e.g. Brazil);

• Introducing local content provisions to train and hire local workforce in the extractive industries (e.g. Namibia, Nigeria, Angola);

• Creating industry linkages and extensive supplier development programmes.

• Reward schemes (e.g., bonuses and award of new contracts) to encourage contractors to increase local content in their activities.

Human Capacity and Education

Public expenditure on education as a percentage of total government expenditure, 2010*

- 5 10 15 20 25 30

African CDDCs**(2009) United States

(2003) Equatorial Guinea(2005) Congo, Rep.

ZimbabweAngola

Congo, Dem. Rep.Chad

Central African Republic(2008) Liberia

(2006) SeychellesCape Verde

(2011) Malawi (2004) Zambia(2009) Uganda

Mauritania(2009) Botswana

(2011) Rwanda Niger

Kenya(2009) Togo

Cameroon(2009) Sierra Leone

(2009) BeninTanzania

(2008) Guinea(2008) Algeria

Burkina Faso(2006) Mozambique

Mali(2008) Namibia

Gambia, The(2007) Djibouti(2009) Senegal

Ghana(2008) Cote d'Ivoire

BurundiEthiopia

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Source: World Bank, databank

• Build an appropriate legal, regulatory and institutional framework;

• Stimulate the participation of private sector in the infrastructure development;

• Enhance the role of investment promotion agencies;

• Consider social dimension of the investment in infrastructure;

• Mobilize various sources of funding to invest in the infrastructure.

Infrastructure Development

1. Short-term instruments aimed at increasing local industry participation:

• Local content performance targets;• Joint ventures to have immediate access to

projects;• Taxation regimes in favor of local content;• Regulation and bidding parameters that

include local content criteria.

Industrial Base (I)

2. Long-term instruments to build up local industry capacity:

• Invest in infrastructure and education;• Promote R&D to spread the knowledge to

be used in other sectors around the extractive industry;

• Encourage the transfer of technology and knowledge to domestic companies.

• South cooperation could be useful in transferring “best practices”!

Industrial Base (II)

• A legal framework that ensures property rights;

• Independent regulatory bodies separated from operating activities;

• A clear fiscal and administrative framework;

• A sound revenue management system;• Clear regulations to protect

environment, workers' rights and the rights of local communities.

Governance

• Adopt a multi-stakeholder approach in devising local content strategies/policies;

• Establish realistic local content strategies taking fully into account the local capacities and the needs of the extractive industries;

• Integrate local content policies into the inclusive development policies in host countries;

• Create an independent authority to monitor and enforce local content policies;

Recommendations (I)

• Local content policies should not be in conflict with the commitments that the country made in the relevant international agreements;

• There is no one-size-fits-all model on local content. Countries should devise the strategies based on their specific conditions.

• A certain degree of preference to ensure local producers' participation in the value chain has positive impacts on the industry development.

• State-owned extractive companies could play a crucial role in stimulating local participation in the industry.

Recommendations (II)

UNCTAD, Special Unit on Commoditieshttp://www.unctad.info/Special-Unit-on-Commodities