Issues in designing local content strategies in host countries

1. Issues in designing local content strategies in host countries Samuel Gayi Special Unit on Commodities, UNCTAD VI Workshop on Development challenges and Policy options for managing the extractive sector 26-26 April 2013, Dar es Salaam

2. Structure of Presentation • Why local content strategies are important for host counties? II. Devising local content strategies: some key issues V. Recommendations

3. Economic Impact of Extractive Industries on Host Countries Positive impact: Generator of export revenues and foreign exchange; Major source of government income; Positive economic externalities through vertical and horizontal linkages (?)

4. 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.

5. Why Local Content Strategies are Important for Host Counties? 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.

6. 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).

7. Mining value chain Exploration Development Mining Mineral Processing Smelting & Refining Value Addition Transport & Storage

8. Devising Local Content Strategies: Some Key Issues Political and macroeconomic stability; Human capacity building, including education, in particular technical and vocational; Infrastructure development; Industrial base; and Governance.

9. Political and Macroeconomic Stability 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.

10. Human Capacity and Education 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.

11. Source: World Bank, databank

12. Infrastructure Development 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.

13. Industrial Base (I) 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.

14. Industrial Base (II) 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”!

15. Governance 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.

16. Recommendations (I) 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;

17. Recommendations (II) 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.

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