Governance of Resource-based Industrialisation

Governance of Resource-based Industrialisation Judith Fessehaie Centre for Competition, Regulation and Economic Development University of Johannesburg GDAI Cape Town, 29 March 2017 www.competition.org.za

Introduction Africa s industrialisation strategies need to be framed within the spread of GVCs GVCs dynamics, in particular the strategies of lead firms (TNCs, retail chains, etc), determine allocation of economic rents and opportunities for upgrading Africa has been largely marginalized from GVCs 2014, 57% of Africa s exports consisted of unprocessed commodities (UNCTAD 2016) Underlying problem of structural transformation commodity price boom - fueled growth had a lower impact on poverty reduction compared to other regions (Fosu 2014)

Changing global environment Trade slowdown and slow growing demand in traditional markets SSA s exports of manufactures to DC fell from 5.1% of GDP in 2006 to 2.9% in 2013 Increased South-South trade and implications for value addition in Africa Supplier consolidation: fewer, better suppliers (pre-production and post-production functions, larger scale). increasingly large, competitive and established Competition from China in global and regional markets (Gereffi 2013; Kaplinsky and Morris 2008; Kaplinsky et al. 2012) Challenge for Africa: traditional markets are no longer fast-growing, and are supplied by increasingly large, competitive and established suppliers Need to think of multiple strategies such as: Regional Value Chains Resource-based industrialisation (upstream/downstream)

Resource-based industrialisation: Pessimist views Prebisch-Singer (1950): ToT; natural resources have fewer externalities than manufacturing Dependency theorists (Girvan and Girvan, 1970, 1973): natural resources as enclave industries Resource curse political arguments (Auty 2001, Auty and Gelb, 2001): rent-seeking political class Resource curse (Sachs and Warner 1995, 1997): Dutch Disease, weak learning by doing in the resource sector, commodity price volatility Critique Methodology issues (measuring resource-endowment) Resource curse not robust to different specifications of the natural resource variable and different econometric techniques (Bravo-Ortega and de Gregorio, 2007; Lederman and Maloney; 2007; Maloney, 2007; Manzano and Rigobón, 2007; Stijns, 2005) Why have countries failed to adopt policies to counter-act the Dutch Disease? What are the policy implications of the resource curse proponents? Further studies found resource curse is attributable to quality of institutions (Gylfason 2001; de Ferranti et al. 2002; Stijns 2005)

Insights from economic history: The role of institutions Scandinavia (Andersen 2012, Blomström and Kokko 2007) Findings applicable to both agriculture and mining resources National System of Innovation (from technical skills to R&D, public/private collaboration) Foreign skills and capital in initial stages Lateral migration of industrial competencies into new sectors (aeronautics, Nokia) US (David and Wright 1997; Wright and Czelusta 2007) Resource-based industries in the 19 th century Public investment in USGS and mining engineering tertiary education Exogenous nature of mineral resources: knowledge expands resource discovery, extraction and processing. Example of US vs. Chile copper production

Case Studies MVA Growth (%) 12.0 10.0 8.0 6.0 MVA (% of GDP) 2015 Botswana 6.3 South Africa 13.2 Zambia 7.9 4.0 2.0 0.0 2010 2011 2012 2013 2014 2015-2.0 Botswana South Africa Zambia

Role of mining in economic development BOTSWANA Diamond contributes 33% of GDP in 2014 compared to 60% in 1990 As the world s largest produ er, Govt leveraged De Beers to form Debswana 50% JV Significant diamond rents human capital, infrastructure ZAMBIA Copper mining contribution increased from 10% of GDP in 1990 to 26% in 2013 New Copperbelt (North Western Province) vs. Old Copperbelt output, jo s, inputs SOUTH AFRICA Falling share of mining contribution to GDP (8% in 2015) Historical diversification into capital- and energy-intensive industries (Fine and Rustomjee 1996)

Zambia: A trajectory of upstream linkages to mining sector 1970s-1990s 1969 nationalization of mining assets upstream linkages development strategy (Fessehaie, 2012) State ownership, preferential procurement, ISI, buyer/supplier/institution cooperation, skills devt Broad and diversified manufacturing base, solid skills base competitiveness bottlenecks, weak tech innovation and no R&D, commodity price decline until the early 2000s Post-1995 Structural Adjustment Programme foreign private mine ownership, privatization and liberalization, end of preferential procurement, withdrawal from interventionist policies Shift in composition and value added content of local inputs cluster 5% of locally sourced goods are locally manufactured (ICCM, 2014) Supply side constraints outdated equipment, finance, skills, RDI, high cost operating environment (Kasanga, 2012) Demand side constraints information gaps, lack of incentives for procurement managers

Mapping local mining supply chain

Policy framework Public debate in the 2000s mainly focused on tax regime and labour issues Increasing attention to mining local content issues especially from private sector Overall vision to leverage mining for manufacturing (6 th National Dev Plan) vs. previous focus on diversification Specific policies 1990s 2000s Local content provisions in bilateral Development Agreements between mining companies and govt 2008 Mines and Minerals Development Act Section 13 local content 2008 Commercial, Trade and Industrial Policy no specific focus on local content 2012 Industrialisation and Job Creation Strategy operationalize Sec 13 of MMDA Local Content Initiative Driven by Manufacturing Association in conjunction with the mining companies Govt not playing a major role Focused on information gaps and capacity assessment, potentially business development services Donor funded

Governance bottlenecks LACK OF CLEAR POLICY OBJECTIVES No policy clearly identifies and connects local content and engineering sector development strategies Political pressure and Citizen Economic Empowerment focused on indigenous ownership Mandatory vs. voluntary approaches to local content INCOHERENCE BETWEEN DIFFERENT POLICY OBJECTIVES FDI incentives grant duty free and VAT deferment for capital equipment imports subject to local production no monitoring Duties on components discourage assembly revenue collection vs. value addition No comprehensive strategy on FDI, value addition (skills, finance) POOR IMPLEMENTATION Several policy documents not matched by additional budgetary allocations Reliance on donor funding preference for new programmes rather than building on existing ones No clear mandate on local content (institutions responsible for mining, industry, policy implementation?) Target and monitoring of local content Weak political leadership Weak private sector participation (Sectoral Advisory Groups)

South Africa Apartheid era Innovative solutions to the geological and metallurgical challenges of hard rock, deep level mining Chamber of Mines Research Organisation (COMRO) blue sky R&D Strong National System of Innovation (NSI) Cooperation and competition Gold: mineral processing, deep mining Coal and PGMs migration of supplier tech capabilities After 1994 The internationalisation of the South African mining inputs cluster in post-apartheid era has been a multifaceted process global OEMs investing in South Africa to serve the domestic and regional markets domestic OEMs acquired by global OEMs, and their activities have been re-organised within the global operations of the parent companies from the mid-2000s, growing exports from domestic OEMs Closure of COMRO shift of resources to public R&D Erosion of NSI (fewer skills, less R&D expenditures, weaker linkages with mines and firms)

Evolution of the Mining Charter 2002 Minerals and Petroleum Resources Development Act (MPRDA) Development of a sectoral codes 2004 Mining Charter DMR and mining industry stakeholders, including the Chamber of Mines, South African Mining Development Association and the National Union of Mine Workers BBBEE preferential procurement 2009 review of the implementation progress of the Mining Charter lack of progress 89% of companies had not given HDSA companies preferred supplier status Companies that did report, 37% procurement from HDSA companies (number of total vendors) less than 3% of value of total procurement expenditure. No plan to increase BBBEE procurement

Contd. 2010 Broad-based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry Procure a minimum of 40% of capital goods from BEE entities by 2014 Ensure that OEMs annually contribute a minimum of 0.5% of annual income towards a social development fund Procure 70% of services and 50% of consumer goods from BEE entities by 2014 2015 review of Mining Charter has found more positive results than the previous report: 81.6% of mining right holders met the 2014 target of spending 40% for capital goods 64.8% of mining right holders met the 2014 target of spending 70% for services 82.7% of mining right holders met the 2014 target of spending 50% for consumables 14.9% of the industry met and exceeded the target of OEMs contributing towards the social fund Mining right holders have been weighted by mine size, using employment figures 2013 DTI issued Amended BBBEE Codes of Good Practice applicable to public procurement more focus on value addition

Erosion of local value added Opportunistic behaviour Global OEMs and large suppliers meet the BBBEE requirements by supplying via BEE compliant agents without transforming contributing to community development funds BBBEE ownership defined as 25%+1 BBBEE mining companies procurement strategies focused on the ownership profile of their suppliers agents and distributors are not obliged to disclose their local content re-investment in business? New entry or transformed incumbents? largest OEMs and large suppliers (Scaw, Shell, Engen) have concluded empowerment deals insignificant new entry by black industrialists Misalignments between Mining Charter and BBBEE codes Institutional responsibilities DMR vs. DTI, established auditing capabilities within DTI Recent reviews of the Mining Charter aimed at focusing on value addition and BBBEE

Botswana Diamond production expected to decline by 2030 + good investment environment has not translated into FDI into value added activities diversification and job creation challenge Economic diversification objectives articulated in National Development Plans, industrial and trade policies 6 hubs: Diamond, Health, Education, Agriculture, Innovation, and Transport Institutional bottlenecks poor coordination and implementation of industrial policy initiatives, reliance on public procurement Supply side constraints low firm technological capabilities, inadequate infrastructure, and mismatch of industry skills Progress on the Innovation Hub investment in infrastructure for R&D and innovation, construction of a science park, attracting skilled labour, setting up IP protection mechanisms, strategic collaborations

Diamond value chain

Value addition in the diamond pipeline

Beneficiation policy 50% JV Government and De Beers Debswana 60% of De Beers global output 2005 beneficiation policy leverage of govt on De Beers at license renewal Strategy based on De Beers market power on global production, marketing and distribution Targets of the diamond global value chain (Mbayi 2011): sorting and valuing marketing polishing and cutting Clear requirement at least US$500 million per annum of De Beers Botswana s diamond output be reserved for local beneficiation, later raised to US$800 million a year Diamond cutting and polishing firms are granted licences to operate in Botswana and access reserved diamonds subject to strict local training requirements Penalties and fiscal incentives

Effective implementation mechanisms Diamond Hub coordinating activities in the diamond sector across govt institutions Investment in the Diamond Technology Park agglomeration economies government service providers: Diamond Office tasked with building strategic alliances with cutting and polishing companies, developing infrastructure, and enabling a favourable fiscal regime processing firms Specialized suppliers such as trading, financial, brokering, logistical, security, and machinery suppliers Gemmological Institute of America

Outcome Outcome: Sorting, valuing and marketing Diamond sorting and valuing historically done by the London Mix, replaced by Gaborone International Mix Diamond marketing govt-owned Okavango Diamond Company, a distribution company receiving 15% of national output Bulk of De Beers rough diamond production is sold in Botswana Rent appropriation and localization of a small niche of highly skilled, high value services such as Kimberley Certifications A large group of representatives of De Beers sight holders more than 80 of the world s leading diamantaires travel to Gaborone up to 10 times a year Outcome: polishing and cutting Local processing is 15% more expensive than the international benchmark Leverage on firms desiring access to Botswana diamonds (large size, high quality stones) In 2013, exports of polished diamonds worth BWP6.6 billion (approximately US$759 million) Employment increased from 2,200 workers in 2008 to 3,750 in 2013 Skills transfer key element of the beneficiation strategy because cutting and polishing is skill intensive Skills can only be transferred with significant on-the-job and in-house training Skills transfer with regard to management has been less successful

Threats to beneficiation policy GLOBAL COMMODITY MARKETS Misalignment of supply and demand at different stages of the value chain Financialization led to the increase in the prices of rough stones Market for polished stones collapsed due to an oversupply of polished diamonds and falling demand from the Chinese market (luxury retailer Chow Tai Fook expansion by 300 stores in one year, each outlet requiring US$50 million in stock for display. As final consumer demand fell, US$3 billion in polished diamond stocks) Cutting and polishing margins fell from 15% pre-financial crisis to 0-5% In 2015, 3 large diamond cutters closed their plants in Botswana resulting in 500 job losses (Grynberg 2015) Crisis exacerbated by weak cost competitiveness (higher labour costs, lower labour productivity than Indian firms) NEED FOR POLICY ADJUSTMENTS Beneficiation obligations only applied to the US$800 million, the rest of Debswana output can be purchased and processed overseas, diamond manufacturers could relocate out of Botswana Botswana s government unable to formulate a decisive response because of conflicting interests in two different stages of the value chain, at rough production stage and cutting and polishing stage LEAD FIRM MARKET POWER De Beers reduced market power controls only 33% of global output PRODUCT SUBSTITUTION Diamonds are now competing with other luxury goods (handbags, electronics)

Reflections on governance of resource-based industrialisation Political economy of control over mineral rights and rent appropriation Botswana govt JV with De Beers Stable and growing diamond prices vs Zambia privatization of mining assets in time of crisis Lost battle with the mines over appropriation of mining rents (2008 Act and following revisions of tax regime, scrapping of windfall tax) Copper price variability The role of the State Political economy of conflicting interests over value addition Foreign (global OEMs) vs domestic interests Domestic manufacturing vs trading interests Trade unions

Contd. Policy design Clear objectives Targets Coherence with trade policy Sanctions (explicit or implicit) Institutional coordination Industry vs Mining departments Finance/FDI vs Industry Skills development, Technology, R&D Implementation Political will Resources Monitoring External threats Commodity price fluctuations