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June 2014
Leveraging extractive industry investments to create upstream and
downstream linkages
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Maximizing Linkages from Extractive Industries
Source: ECDPM
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Looking at resource based industrialized countries
• Industrial development based on continued exploitation of natural resources
• Increased domestic value added thanks to linkages• Mine sites became growth centers instead of
enclaves• Thanks to Local Content and Linkages
• Mines provided jobs, • Helped build the domestic private sector, • Facilitated technological transfer, • Built a competitive local workforce
To achieve this, it is necessary to have the right regulatory framework in place with strong Government guidance at its core.
Australia, United State, Canada, Finland, Norway…
1. What are the different types of job impacts and are they quantifiable?
2. Linkages to the extractives sector: how does it work?
3. Local content regulations
4. Beyond the regulations, what should be at the core of a government-led policy?
5. How to diversify a resource-based economy?4
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3 types of employment impacts and multipliers
• Direct: Employing Locally• Indirect: Sourcing Locally• Induced: Spending Locally
• Spill - over effect measured by the “multipliers”
“At full production, Copper Mountain will employ 272 personnel and with an indirect job creation multiplier of
4 to 1, the mine could create over 1000 jobs “
SPILL-OVER EFFECT
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About the complexity of reporting job impact through multipliers
There is no standard way of measuring the multiplier effect : Input – Output model, CGEM, full time/part-time , Induced included?
Multipliers only measure short term economic changes whereas mining impact is long term
Mining- job creation causality often over-stated. Often other changes are happening in the economy in parallel
Inherent data problem – mines do not collect the job creation by sub-contractors
National accounts generally classify jobs according to the business of the employing company rather than the job performed
•World-cla
• On average, a multiplier effect (including direct, indirect and induced with I-O Model) of 3.37 at national level for world class mines versus 2.25 for smaller mines
• Antamina, Peru 9,795 people 3-year construction phase. Currently directly employs app.1,850 individuals
Text • Type of ownership• Size of the mine• Type of commodity• Age of the mine• Mine life cycle phase• Type of mining operation• Stage in the industry process (upstream versus downstream).
FACTORS INFLUENCING JOB IMPACT
EXAMPLES
Generalization about job impact is impossible
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Job impact – what is the hype about?
Barrick In Tanzania : “Barrick alone has 4,200 employees in its mines and hires an additional 5,000 contractors. Indirect employment is even greater. It is generally believed that for every job in the mining sector, three indirect jobs are created. Approximately 50,000 Tanzanians are currently employed in jobs related to mining.”
How accurate is it ?
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Improving communication and adjusting expectations
In response, investors should give clear answers to the questions When do the jobs come?, Who will get the
jobs?, Where will the jobs be? and What type of jobs will they be?
Investors : prepare their training programmes in consultation with local authorities and communities
Governments (national + local): clarify local needs and conditions to investors + adapt local development
planning to realistic estimates of employment impacts
Need for communication on conservative estimates
1. What are the different types of job impacts and are they quantifiable?
2. Linkages to the extractives sector: how does it work?
3. Local content regulations
4. Beyond the regulations, what should be at the core of a government-led policy?
5. How to diversify a resource-based economy?10
Linkages in the mineral industry
Source: Lydall 2010
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Linkages in the Aluminum Sector
The higher the processing the more sophisticated the upstream linkage (higher level of r&d, skills…)
Upstream linkages throughout the value chain
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Downstream linkages
Factors determining downstream processing:• Quantity of extracted
minerals• Market location of
mineral/processed product
• Existing processing capacity
• Value to weight ratio: The lower the ratio, the greater the location advantage due to transport costs
• Access to infrastructure and competitive labor
• Business environment
Benefits from downstream processing:• Increase in GDP• Creation of further
employment opportunities
• Reduced volatility of export earnings due to commodity price swings
• Transfer of knowledge and technology
• Economic diversification
The value of the mineral contained in downstream products relative to that in the first saleable product can reach a factor of 400
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Impediments to linkages
Human resource deficiencies
Poor infrastructure and trade constraints
Lack of access to finance
Integration of multinationals
Lack of clear resource-based industrial policy guiding public- private collaboration
1. What are the different types of job impacts and are they quantifiable?
2. Linkages to the extractives sector: how does it work?
3. Local content regulations
4. Beyond the regulations, what should be at the core of a government-led policy?
5. How to diversify a resource-based economy?16
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Implementing local content: under which framework?
Voluntary company scheme Non-binding framework policy framework – Trinidad, Chile Legislation – LC Stand Alone (Angola, Ghana, Equatorial Guinea,
Indonesia, Kazakhstan, Nigeria, Russia, South Africa and Zimbabwe ) vs Insertion of LC requirements into laws (minerals, labor, PPP…) – frequent across the board
Contracts – Across the board – and Mongolia Bid: Allows flexibility for innovation as LC priorities evolve -
Brazil
No regulations can be successful as well (i.e, Chile) as long as: Participatory policymaking - collaboration across government, private sector, strong support to SMEs, agencies devoted to linkages
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Increasing national legal requirements for local content, but is it efficient?
58 resource rich countries had legal local employment provisions in 1995. In 2013, 80 countries had legal requirements.
75% of countries have simple blanket legislation 80% of these provisions are disconnected from available
capacity 95% of these country requirements have no time frames
for phasing out local content provisions to stimulate the growth of competitive world class industries
Most of these countries had no supporting institutions to help ensure these targets are met.
Definitions of local content vary considerablySource: McKinsey Global Institute (2013)
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What are the broad categories of LC requirements?
Local employment
Training
Local Procurement
Technology Transfer
Local ownership
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Challenge of local content regulations: Problem of definition
1. Should a “local” company be defined by where it is registered, or by its ownership structure, its management, its staff complement, or a combination of these?
2. How should the level of local content be compared between a locally owned importer/ distributor and a foreign-owned company that is manufacturing locally and sourcing its raw materials locally?
3. Due to quality concerns of the mining company, how “competitive” should the local companies be?
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What terms make Local Content requirements inefficient?
Why?…Because of the following risks:
What is a possible definition to avoid that risk?
Why do you need to define a “local company”?
Possible to have companies with locally registered but with no local ownership or local ownership with no local employment
Require significant participation of “locals” in ownership, management and employment
Why do you need to define “local goods”?
Possible to source from locally-owned or registered trading company that imports foreign goods instead of locally manufacturing goods
First preference to goods with “higher levels of local value additions”
Should the company source local goods only when they are “competitive”?
Company will always explain that local goods and companies are not competitive with clause s.a “source local goods whenever prices at competitive international terms and of quality comparable”
“except in those cases where the Company can demonstrate it is not reasonable and economically practicable to do so”
Avoiding loopholes
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Challenges of local content regulations
1. Can a company use its business as usual tender procedure?
2. Is it sufficient for a company to follow its local content plan drafting at the outset of the project?
3. When shall a company plan for local content? Can it be after the mine is developed and when there is more certainty about revenue flows?
4. Are penalties efficient to enforce local content provision ?
5. Does successful local content with the main Contractor ensure local content across the whole supply chain?
What terms make Local Content requirements inefficient?
Why?…Because of the following risks:
What is a possible definition to avoid that risk?
Should the contractor share its tendering procedure?
Not disseminating in the local journalsUsing complex English inaccessible to local suppliers
Detailed processes for dissemination of information on opportunities (specific format and language requirement for tenders by extractive companies)
Should the contractor regularly update its Local Content Plan?
Using the same targets established at the beginning of project 15 years ago when the country was lacking all skills
Establish mechanisms for periodic updating of the list of foreign goods/ local goods on a time scale
When should the contractor be required to plan for local content?
If not done at the time of the feasibility study, it will not be part of planning and financing
Require a local plan when applying for mining/oil license
Should there be penalties for non compliance with local content requirements?
Companies will prefer paying penalties – often too low to be costly
If penalties in place, high ones is better but policy of collaboration with companies often more efficient than prescriptive system
Should local content apply to subcontractors?
70% of oil sector subcontracted- with often no requirements on sub-contractors
Hold the main contractor accountable for sub-contractors
Avoiding loopholes
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Roadblock to LC : trade and investment treaties
WTO: Aim to lower tariffs and non-tariff barriers Limiting performance requirements related to trade in
goods (TRIMs Agreement in 1995) Local procurement and trade balancing rules in particular
Limiting performance requirements related to trade in services (GATS Agreement in 1995) according to a “positive list”
Special & Differential Treatment Articles (SDTs) expired besides for LDC
Bilateral and Multilateral Trade and Investment Treaties International investment agreements with Japan, USA,
Canada and others forbid performance requirements beyond TRIMs
NAFTA: Example of Mobil vs. Canada
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What TRIMs and GATS leave untouched
Requirements to establish a joint
venture with domestic participation
Requirements for a minimum level of domestic equity participation by
domestic individuals or entities
Requirements to locate headquarters
in a specific region
Employment requirements
Export requirements (as opposed to export
restriction)
Requirements to transfer technology, production processes or other proprietary
knowledge
Research and development requirements
BITs can go farther Investment treaties can affect a country’s ability to
impose local content requirements through: Typical non-discrimination provisions (“national treatment”
and “most-favored nation” obligations), which are relevant when:
1.host countries require some foreign investors to source from certain goods and service providers but don't impose similar requirements on other investors; and
2.host countries give an advantage to domestic goods and services providers over foreign providers, but only where the foreign provider of goods or services has or, for a “pre-establishment” treaty, intends to have, a presence in the host country;
restrictions on capital transfers; “pre-establishment” protections, which prevent a state
from imposing conditions on foreign investors (but not domestic investors) in order to establish an investment in its territory, ( such as requirements to transfer technology to local firms, to establish the firm through a joint venture, or to reinvest a certain amount of capital in the host country);
incorporation of the TRIMs agreement; and explicit prohibition of performance requirements.
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…. And conditional incentives
IIAs are also increasingly barring states from offering incentives to investors in exchange of achieving local content targets
While some IIAs contain certain exceptions to these obligations, if such exceptions are not included, the restrictions will be much broader than they are under the TRIMs, and subject to investor-State dispute settlement.
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Examples of BIT clauses limiting Local Content policy space
Trinidad and Tobago & United States Article VI - Performance requirements “Article VI prohibits either Party from mandating or enforcing performance
requirements in connection with a covered investment. The list of prohibited requirements includes the use of local goods, the export of goods or services, the ‘‘balancing’’ of imports and exports, the transfer of technology, or the conduct of research in the host country. Such requirements are major burdens on investors and impair their competitiveness.”
Uganda and Sweden Article 2 - Promotion and Protection of Investments “(3) Each Contracting Party shall at all times ensure fair and equitable treatment of
the investments by investors of the other Contracting Party and shall not impair the management, maintenance, use, enjoyment or disposal thereof nor the acquisition of goods and services or the sale of their production, through unreasonable or discriminatory measures.”
Nigeria and United Kingdom Article 3 – National Treatment And Most-favored-nation Provisions “(3) Notwithstanding the provisions of paragraphs (1) and (2) of this Article, either
Contracting Party may grant to its own nationals and companies special incentives in order to stimulate the creation of local industries, provided they do not significantly affect the investment and activities of nationals and companies of the other Contracting Party in connection with an investment.”
1. What are the different types of job impacts and are they quantifiable?
2. Linkages to the extractives sector: how does it work?
3. Local content regulations
4. Beyond the regulations, what should be at the core of a government-led policy?
5. How to diversify a resource-based economy?
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Baseline Analysis
• Goods • Services• Labor skills
Demand from
Investment• Industrial base• SMEs• Labor skills and available
courses• Technology
Take Stock and Identify
Gaps
• Short, medium and long-term• Areas of strategic importance
Identifying Potential
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Upstream linkages over time: Illustration
• Transport• Catering• Security• Simple goods and service purchasing
Low-hanging fruits
• Supplies and parts -Equipment purchasing
• Transport -Logistics• Maintenance -Construction &
civil works• Agriculture inputs -Waste management
Medium-term
• Civil works• Construction• Technical Services
Long-term
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Targets and Timelines1. Quantify the commercial impact of different
local content targets and timelines 2. Set targets
Too high – scare away investment, investors accept fines or find loopholes
Too low – not maximizing potential linkages 3. Carefully develop indicators to measure targets
Headcount Expenditure
4. Review and update targets on a regular basis5. Determine fines & penalties for non-
compliance
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Monitoring
Determine whom monitors which local content aspects
Accompany and oversee tender process Mandatory reporting requirements
Reporting templates Set deadlines (monthly, quarterly, annually) Transparency
Strengthen oversight and audit capacity within the Government
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Supporting Local Companies• One stop shop
• Multi-stakeholder
Implementation Committees
• Expectations
• Workshops• Feedback
Procurement Communicatio
ns Plan
• Tenders• Companies• Contacts
Information Sharing Platform
• Dedicated fund
• Provide collateral
Financing
• Finance• Management
• Business• Technical
Capacity Building
• Identification
• JV with investor
Facilitating Joint Ventures
• Incubator• Industrial/Technology parks
Cluster Developments
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Some examplesFirst Quantum
Minerals in Zambia
• Training institute that provides apprenticeship programs equipping young adults with artisan skills such as welding, metal fabrication, electrical and other disciplines relevant for upstream linkages in the mining industry.
Anglo American in South Africa
• Enterprise development initiative with a funding model that promotes the mining company to take an equity stake in the SME and provides entrepreneurs with constant business development and technical support
BHP Billiton in Chile
• Cluster program that engages local suppliers to develop innovative solutions to improve operations and become ‘world-class’ global resource industry suppliers. The mine site serves as the testing ground for the accepted project proposals.
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Coordination
• Monitoring• Disseminati
on• Moderate
disputes
• Capacity building• Project alignment
• Potential for PPPs
• Best practices
• One stop shop
• Communicate opportunities
• Finance
• Industrial/SME policy
• Education strategy• Sub-national
policies• Supporting
infrastructure Government Investor
Civil SocietyDonors
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Oyu Tolgoi Contract and Local Content
“Not less than 90% of the investor's employees will be citizens of Mongolia;
At least 60% of the entities' employees for construction work, and at least 75% for mining and mining-related work, will be citizens of Mongolia;
If the investor employs foreign nationals exceeded 10%, it must pay a specified charge to an Employment Promotion Fund to be spent on training of citizens of Mongolia
Within 5 years the investor must ensure that at least 50% of employed engineers, and within 10 years, at least 70%, are Mongolian citizens;
The investor must submit a OT Training Strategy and Plan to focus on training skilled workers and training them for professions relevant to the project and mining in general;
The investor must also establish a graduate scholarship program including 120 scholarships for students at Mongolian universities and 30 to Mongolian students at international universities;
The Investor must support special business development programs to assist in starting and growing local businesses so they can supply the project, as well as the expansion and diversification of Mongolian business partners so that they are not fully dependent on the project.”
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What would you advise to Mongolia?
Can these local content requirements be enforced?
What are the risks? What should have be written differently? What is missing? Is it in line with international law ?
1. What are the different types of job impacts and are they quantifiable?
2. Linkages to the extractives sector: how does it work?
3. Local content regulations
4. Beyond the regulations, what should be at the core of a government-led policy?
5. How to diversify a resource-based economy?39
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Economic diversification out of extractives
• Why are resource dependent countries less diversified? Does it matter?
• Why are some resource rich countries better at diversifying (Chile, Indonesia and Malaysia) than others (Botswana, Azerbaijan and Kazakhstan)?
The Product Space Theory
Source: Hausmann, Hidalgo et al.
Extractive Resources less ‘complex’ & ‘connected’
Machinery
Petroleum
Mining
Electronics
CoalGarment
s
Construction
Chemicals
Source: Hausmann, Hidalgo et al.
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Whom produces what?
Source: Hidalgo et. al (2007)
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Malaysia on the product space
1980: RCA in palm oil, timber products and crude oil
1995: Move into garments and electronics sectors
2010: Moving into machinery and equipment?
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Malaysian example• Malaysian Industrial (now Investment) Development
Authority (MIDA) formed in 1965• Established a investment framework and export
processing zones in the early 70s• Rapid industrial expansion in textiles and electronics until
the middle of the 90s, particularly due to competitively-priced and relatively well educated labor
• First Industrial Master Plan launched in 1986. • In 2006 the third Industrial Master Plan was launched
setting out targets and sectors that the Government will support
• BUT, recently Malaysia has struggled to move up the value chain into design engineering and R&D, due to insufficient funding in this area
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How to diversify?
• Countries, especially resource rich ones, should guide investments through industrial/diversification strategies
• Industrial strategies should aim to move to more ‘complex’ and ‘well-connected’ sectors, but ensure that this transition is gradual/realistic based on currently produced goods and existing comparative advantages
• Industrial strategies should set out R&D, infrastructure and human capital investments that will support the identified sectors
• Industrial strategies should reward first entrants into new sectors, but this should be done on a short term basis
• Industrial strategies should be flexible and adapt to national and regional developments
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What is your country’s profile? Go to: atlas.media.mit.edu, click on the ‘explore link’,
select your country and use the ‘SITC’ classification. Familiarize yourself with the website (see demonstration)
and answer the following questions: Has your country become more or less dependent on
extractive industries over the years? (use stacked figure) Can you observe potential signs of Dutch Disease? (use
stacked figure) Are your country’s exports placed on the fringes or well-
connected parts of the product space? (use network figure) Which ‘categories’ should the government target in order to
move to the more connected parts of the product space? How does your answer of the above question compare with
your countries’ industrial policy if it has one?