Leveraging extractive industry investments to
create upstream and downstream linkages
June 2014
Maximizing Linkages from Extractive Industries
Discussion Paper No. 156
www.ecdpm.org/dp156
Figure 5: Maximizing value chain through economic linkages
Source: ECDPM
Looking at resource based industrialized
countries
Australia, United State, Canada, Finland, Norway…
•
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.
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?
3 types of employment impacts and multipliers
• Direct:
Employing Locally
• Indirect:
Sourcing Locally
• Induced:
Spending Locally
SPILL-OVER
EFFECT
• 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 “
About the complexity of reporting job impact
through multipliers
Generalization about job impact is impossible
FACTORS INFLUENCING JOB
IMPACT
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).
EXAMPLES
•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
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 ?
Improving communication and adjusting
expectations
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?
Linkages in the mineral industry
Source: Lydall 2010
Linkages in the Aluminum Sector
Upstream linkages throughout the value chain
The higher the processing the more sophisticated the
upstream linkage (higher level of r&d, skills…)
Downstream linkages
The value of the mineral contained in downstream products relative to that in the first
saleable product can reach a factor of 400
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
Impediments to linkages
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?
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
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 considerably
Source: McKinsey Global Institute (2013)
What are the broad categories of LC requirements?
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?
Avoiding loopholes
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”
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?
Avoiding loopholes
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
journals
Using 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 subcontractedwith often no requirements on subcontractors
Hold the main contractor
accountable for sub-contractors
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
What TRIMs and GATS leave untouched
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.
…. 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.
Examples of BIT clauses limiting Local
Content policy space

Trinidad and Tobago & United States Article VI - Performance requirements


Uganda and Sweden Article 2 - Promotion and Protection of Investments


“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.”
“(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?
Baseline Analysis
• Goods
• Services
• Labor skills
•
•
•
•
Industrial base
SMEs
Labor skills and available courses
Technology
• Short, medium and long-term
• Areas of strategic importance
Upstream linkages over time:
Illustration
•
•
•
•
Transport
Catering
Security
Simple goods and service purchasing
•
•
•
•
Supplies and parts
Transport
Maintenance
Agriculture inputs
• Civil works
• Construction
• Technical Services
-Equipment purchasing
-Logistics
-Construction & civil works
-Waste management
Targets and Timelines
1. 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 basis
5. Determine fines & penalties for non-compliance
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
Supporting Local Companies
• One stop
shop
• Multistakeholder
• Finance
• Management
• Business
• Technical
• Expectations
• Workshops
• Feedback
• Identification
• JV with
investor
• Tenders
• Companies
• Contacts
• Incubator
• Industrial/Te
chnology
parks
• Dedicated
fund
• Provide
collateral
Some examples
• 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.
• 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
• 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.
Coordination
• Industrial/SM
E policy
• Education
strategy
• Sub-national
policies
• Supporting
infrastructure
• Capacity
building
• Project
alignment
• Potential for
PPPs
• Best practices
• One stop shop
• Communicate
opportunities
• Finance
• Monitoring
• Dissemination
• Moderate
disputes
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.”
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?
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’
Source: Hausmann, Hidalgo et al.
Whom produces what?
Source: Hidalgo et. al (2007)
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?
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
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
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 wellconnected 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?