Are they coherent with international trade and investment policies

Managing Economic Transformation and Value Chains Development:What Role for SADC Member States and the SADC Secretariat?

5-6 April 2016Cresta Hotel, Gaborone, Botswana

Extractive resources and value chains

Isabelle RAMDOODeputy Head of Programme, Economic Transformation

ECDPM

Part I: Ongoing reforms to secure resource-based industrialization

Part II: How and where do national/regional policies intersect with international trade and investment commitments?

Part III: Is there any policy space left? What alternatives to rules?

Structure of presentation

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PART IResource-based industrialization

What approaches and what instruments?

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Although important, overall contribution of extractive sector not sufficient

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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

Why RBI reforms matter?

Objective:

Enlarge the contribution at the bottom

Purpose: to reap greater benefits from their resources; to add more value to raw materials; to stimulate economic diversification

Key reforms include:(i) Regulatory/ legislative reforms: review of mining and

petroleum laws/ primary and secondary laws; contracts renegotiations;

(ii) Fiscal reforms (royalties; corporate taxes; licensing fees)(iii) Reform of the business environment to attract investors in

mining related businesses and to provide incentives;(iv) Industrial policies, including policies to encourage upstream

(local procurement policies) and downstream linkages (beneficiation and processing policies);

(v) Trade policies to support industrial policies (export restrictions; tariffs on certain goods (e.g. cement in Nigeria)

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Key reforms in the last two decades

• The optimisation of economic linkages has gained increasing attention and traction.

• Countries are focusing essentially on the development of

linkages (i) Within the extractive sector, i.e. development of mineral

related goods and services; manufacturing activities to add value to mineral sources;

(ii) Outside the extractive sector, i.e. development of linkages between the extractive sector and other sectors of the economy, such as agriculture (e.g. fertilisers; manufacturing machinery) and services (e.g. Dubai)

Optimizing linkages

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Understanding linkages: An illustration

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• No agreed definition of what ‘local’ and ‘content’ are. Interpretation is broad and flexible. But bottom line is that extractive resources must translate into more benefits and create more opportunities for local actors;

Key features include

• Increase local employment at different stages of the VC and different competencies

• Maximise local procurement and preferences for local suppliers• Increase share of value addition and optimizing linkages (forward,

backward and lateral)• Ownership and participation of local stakeholders in various stages on

the VC• Multi-purpose infrastructure use (corridors)

Local content in development of linkages

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What instruments to foster local content in RBI?

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All resource-rich countries have, at some point, implemented local content policies.

Examples of requirements

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LCRs have been more effective when:

1. There was the capacity to deliver and industries are competitive (Norway; Chile (mining); Brazil (oil); Malaysia (oil); Australia (mining)

2. They were temporary and performance-based 3. They were flexible and adaptive (given commodity price cycles)4. There was a balance between regulatory measures and ensuring

the competiveness of companies5. 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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3. Are RBIs effective? What conditions of success?

Part II

RBI and Trade and Investment policies:

Interaction and contradiction

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Summary of possible intersection between domestic reforms and legal commitmentsReview of mining codes/ lawsLocal content policiesBeneficiation policies

FTAs, BITsGATT III; TRIMS, FTAs, BITsTRIMS, BITs, FTAs, contracts

Fiscal reforms Contracts (stabilization clauses); BITsEmployment requirements BITs, GATSBusiness environment reforms that may affect: Foreign investment Domestic investment (e.g

incentives for local private sector)

BITs, TRIMS, FTAs; GATT III; GATS XVIBITs, ASCM; GATT III; FTAs

Trade policies (e.g. quotas; tariffs, export restrictions)

FTAs, WTO

Transfer of technology BITsIncrease in equity participation BITs

1. Many LCRs (and industrial policies) can potentially be inconsistent with WTO disciplines. Key WTO provisions relevant to LCRs are:

1. GATT III.4: Prohibits discriminatory treatment bet. domestic & foreign firms for like products.

2. GATT III.5. Specifically focused on LC, prohibits quantitative regulations for use of products in specific amounts.

3. TRIMS (do not apply to services): prohibits most forms of performance requirements;

4. 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)

5. GATS Art XVI: Depends on what countries have committed in their schedules

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Legal obligations

1. WTO Agreements

BITs contain a number of guarantees such as fair and equitable treatment, full protection and security, protection from discriminatory treatment, protection from expropriation and free transfer of funds.

Provisions often 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

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2. Bilateral investment treaties

Overview of BITs in SADC countries

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Countries No. BITs signed

No. BITs in Force

Countries No. BITs signed

No. BITs in force

1. Angola 9 4 9. Namibia 14 82. Botswana 10 2 10. Seychelles 5 13. DR Congo 19 5 11. S. Africa 49 294. Lesotho 3 3 12. Swaziland 6 45. Malawi 6 3 13. Tanzania 20 126. Madagascar 11 9 14. Zambia 13 77. Mauritius 42 25 15. Zimbabwe 32 158. Mozambique 25 14

Together, SADC countries have signed over 250 BITs to date, of which over 100 are currently in force.

In 2012, SADC prepared a BIT Treaty template, as a standard ‘model’ for member states to use in the development of their own model BITs or as a guide for future BIT negotiations (in line with the Protocol on Finance and Investment, which promotes the harmonization of investment policies and laws).

A number of countries have planned not to renew BITs or to denounce them (South Africa already stopped a number of them); similar trends in countries like Indonesia.

However, beware of survival clauses in BITs: These are provisions that allow for investment claims to be brought even after the treaty has been terminated.

An example from the US Model BIT, in Article 22, paragraph 3:

‘For ten years from the date of termination, all other Articles shall continue to apply to covered investments established or acquired prior to the date of termination, except insofar as those Articles extend to the establishment or acquisition of covered investments.’  

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Bilateral FTAs: The Spaghetti bowl of EPAs in SADC

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Country EPA configuration Country EPA configuration

1. Angola No EPA 9. Namibia SADC EPA2. Botswana SADC EPA 10. Seychelles ESA EPA3. DR Congo No EPA (but

negotiating with central Africa)

11. South Africa SADC EPA

4. Lesotho SADC EPA 12. Swaziland SADC EPA5. Malawi No EPA (but

negotiating in ESA configuration)

13. Tanzania EAC EPA

6. Madagascar ESA EPA 14. Zambia No EPA (but negotiating in ESA configuration)

7. Mauritius ESA EPA 15. Zimbabwe ESA EPA8. Mozambique SADC EPA

Art. 26: Export duties or taxes: Art. 26.1 prohibits the use of or the introduction of new export duties. However, BLNS and Moz countries can introduce new export duties or taxes in “exceptional circumstances”, notably:(i) For specific revenue needs;(ii) To protect infant industries;(iii) For environmental reasons or (iv) For food security purposes.

The exceptional circumstances will need to be justified and the duties will be temporary. This is allowed only on 8 products per SADC State and shall not be applied for more than 12 years (with possibility of extension). The export duty will not apply to exports to the EU for the first 6 years; from 7th to 12th year, only 50% of the vol. exported shall be subject to the export tax).

The export duty must not exceed 10% of the export value of the product.

Case of SADC EPA: What policy constraint to RBI?

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Article 40: National treatment on internal taxes and regulation

Art 40.3 disciplines local content. “Imported products originating in the other Party shall be accorded treatment no less favourable than that accorded to like domestic products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use”.

Art 40.4 constraints ability to stimulate local processing“The Parties shall not establish or maintain any internal quantitative regulation relating to the mixture, processing or use of products in specified amounts or proportions which requires, directly or indirectly, that any specified amount or proportion of any product which is the subject of the regulation must be supplied from domestic sources.”

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Legal cases:

So far, no case brought in at the DSB at WTO on LC on extractives.

However, 25% of cases brought under BITs are extractives related (not all linked to local content – many linked to expropriation).

Why?

Compensation mechanisms more favourable under BITs than in WTO. WTO has no financial compensation

Most countries have some forms of LC, so you don’t throw a stone at your neighbour’s house if you live in a glass house.

Disciplines under BITs are much stricter and straightforward (there is no flexibility). Arbitral awards cannot be reversed.

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Part III

Is there any policy space left?What alternatives to rules?

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1. Special and Differential Treatment• GATT, TRIMS and the GATS contain various flexibilities for developing

countries under SDT provisions and under other Agreements that make specific cases for developing countries and in particular for low income countries. In total, there are 139 SDT provisions in WTO Agreements for developing countries.

• Longer time frame: Developing countries have longer time periods to implement their commitments and there exist special provisions to allow countries to temporarily derogate from some commitments for development needs (Article 4 of the TRIMS have similar provisions).

 2. LDC StatusLDCs may be exempted from applying certain provisions due to their specific economic conditions. One of these relates to export subsidies. They also have longer transitional periods to implement commitments and can invoke numerous exceptions provided in various agreements to address their development challenges.

Policy space within trade agreements: WTO

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3. Measures affecting imports and exports

Tariffs: GATT does not oblige countries to abolish tariffs. Many developing countries still maintain high tariff levels and can raise them in case of surge in sectoral imports (through us of safeguard measures or for BoP reasons).

4. Measures to support enterprise development

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Exchange rate policies : Not prohibited, but GATT Art XV requires cooperation with IMF regarding a broad range of exchange rate questions such as monetary reserves, BoP or foreign exchange arrangements. Article XV has been narrowly interpreted to cover currency convertibility and liberalisation of payments.

Art XV is ill-equipped to deal with issue such as “currency manipulations” or deliberate undervaluation of currencies (which can work as an import tax or an export subsidy from an economic perspective).

Government procurement: State contracts and procurement policies not constrained for developing countries (fall under Government Procurement Agreement - a plurilateral agreement - to which developing countries and low income countries are not party.

5. Labour requirementsWTO does not constrain countries from hiring local labour. However some countries have have taken commitments under the GATS in some specific sectors

6. Subsidies (a) Subsidies are prohibited (red-light subsidies) when they are specific and they apply to import substitution or exports (in the later case, LDCs are exempted), regardless of their details.

(b) In other cases, specific subsidies are actionable but not prohibited altogether (yellow-light) and can be challenged at the WTO (or not) if they cause serious injury or serious prejudice and can be demonstrated through the ASCM.

(c) Non-specific subsidies (green-light) are non actionable and therefore allowed under ASCM. These subsidies are neutral, economic in natural and horizontal in application. There should be no predominant use by specific enterprises and eligibility is automatic.

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(d) Developing countries can still provide targeted subsidies, direct credit and specific infrastructure, such as measures used by Ireland and Singapore to attract FDI in specific sectors of their economies, as long as those measures are provided on an MFN basis.

(e) Until 1999, specific subsidies given to R&D, to disadvantaged regions and for environmental purposes were considered as non-actionable but these lapsed and governments may now be challenged for such types of subsidies.

7. Measures to promote technology

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• Export duties in ‘exceptional circumstances’ for up to 12 years, on a max of 8 products per country

• Bilateral safeguard for infant industry (applicable to BLNS and Mozambique only but not to SA) :

Duties may be raised or tariff reductions suspended in case of (a) threat to establishment of infant industry or (ii) disturbances to an infant industry producing like or competitive products;

Safeguard to be applied for up to 8 yrs (with possibility of extension)

In case of delay which would be difficult to repair, SADC EPA States may take measures on a provisional basis for up to 200 days

• EPAs do not cover services; investment; IPR; and therefore countries are only bound by their WTO commitments vis-à-vis the EU

Flexibilities in EPAs

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• Initiatives taken by companies to support local supply chains or to employ local labour: Eg. South Africa (Zimele); Brazil (Innove); Chile; Mozambique (Mozal)

• Often framed in ‘CSR’ policies, but are in fact, increasingly linked to their core business.

• Mining companies are encouraged and supported to facilitate procurement for local companies by unbundling contracts, publishing tenders, giving more time for SMEs, helping SMEs to meet all the criteria to supply the mine.

• Successful when partnerships are built with other stakeholders (local private sector, Govt; research institutions)

b. Alternatives to rules: Industry-led initiatives

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What role for SADC?

Ensure policy coherence among various policy instruments and international commitments;

As with the Model BIT, important for countries to have a coordinated approach with their external partners, if regional objectives are to be achieved;

EPAs: the current situation is quite messy. Will be important to think on how to harmonise all this. May be something to bring to the TFTA process, as the three regions seek to have a FTA.

Policy sequencing is important: EPAs for e.g. do not have a services chapter yet. Important to ensure a harmonised approach before sealing a deal with the EU.

Conclusions

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