This presentation looks at local content policies in the extractive sector. It focuses in particular at the opportunities for developing countries in a challenging global environment

1. What opportunities in a challenging global
environment?
Isabelle RAMDOO
West Africa Mining and Power Conference
Accra, 1 – 3 June 2016
Local content in the extractive
sector

2. Outline
1. The current context
i. What do we expect in the short-term?
ii. How do we reverse the trend?
2. Local content: Getting the debate right
I. Key features
II. Where are the opportunities?
III. Cost spending scan
IV. Critical gaps to be addressed
3. Partnership is key
1. What governments and companies can do together
2. What Governments can do?
3. What companies can do?
4. Conclusions

3. 1. The current context
The mining industry and resource-rich governments are facing
challenging times as a result of the prolonged downswings in
commodity prices;

4. This is a combination of (i) demand, (ii) supply and (iii) financial
market conditions:
(i) On the demand side: Two main factors:
ü In the 2000s, demand for raw materials shifted from advanced
economies to the East, fuelled by China’s insatiable appetite for base
metals and energy, needed for its industrial and construction boom
(about 50% of base metal consumption). Since the last few years,
Chinese demand has slowed down (triggered by the transition from
an investment-driven growth towards a more sustainable growth
based on domestic consumption);
ü slow recovery of the global economy from the crisis;
(ii) On the supply side:
ü High demand and high prices for commodities led to supplies build
up in the metals sector.
ü In the oil sector, supply factor played a bigger role, due to OPEC
countries’ decision to maintain production despite US strong shale
production and as a result of earlier investments in new frontiers due
to high prices.
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5. (iii) Tightening of financial markets:
ü Beyond supply and demand, a third factor has been influencing
short-run fluctuations in commodity prices. Weak prices left
many with less cash flows as earnings were absorbed by debt
repayments and servicing.
ü It is also probably true that some companies are in difficult
financial situation, having ‘gorged’ on cheap debts during the
China led-metal boom, now having to pay the price.
ü For these reasons, banks are more prudent in lending and
investors and financial markets move away from what they
perceive to be risky bets, including stocks and commodities.
This so-called “risk off” behaviour has put downward pressure
on prices of both oil and metals.
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6. (ii) What do we expect in the short-term?
The short-term economic prospects do not look very promising:
Ø WB predicts a further 10% decline in metal prices this year;
Ø Oil prices have recently gone up due to problems in Canada and
Nigeria, but the supply glut has not been addressed – shale in
the US might take off again; Iran may add more to SS etc.
This is certainly a challenge for everyone:
Ø For Govts: Less fiscal space, buffers melting like ice, declining
TOT; risk of debt sustainability; pressure on currency reserves.
All this affect the scope of key reforms necessary for economic
diversification (in particular fiscal reforms) but does not
diminish pressure from the population, who is still
expecting returns
Ø For companies: Uncertainty and shrinking confidence about
quick recovery; less cash flow; less capex investments;
tightening financial conditions; increasing pressure from
Govts: as fiscal revenues fall, pressure is shifting to local
content and value addition

7. (iii) How do we reduce the pressure?
– Little we can do to significantly change the commodity prices,
at least in the short-term – it recurrent and cyclical. Some
even say it’s a ‘new normal’.
– But companies and governments can change the mechanics
of their interaction to become more resilient to the effects of
the future potential downturns
– A more sustainable engagement can spread the benefits of
mineral sector to the local economy, beyond rents and taxes
and therefore reduce some of the pressures.
– Viewed differently, the current situation can be seen as a
chance. A chance to finally engage on the fundamentals of
increasing benefits for companies and governments alike.
– But it requires a fundamental change in mind-sets and a
new approach to partnerships.

8. 2. Local content: Getting the debate right
ü This current situation can become a good opportunity to make
sure you have a common understanding of what ‘local’ and
‘content’ mean in your specific context.
ü Currently not the case. No agreed definition of what “local” is or
what “content” means.
ü Mining and oil and gas countries have different approaches to LC.
Stricter in O&G than in mining. Frameworks are often general but
mandatory (‘blanket’ definitions). Do not always reflect capacity to
deliver. Govts play the role of a regulator, but not sufficiently that
of a facilitator or of an investor.
ü Companies approach the issue with a ‘compliance’ mind-set: some
do just what is necessary to meet the requirements but without
integrating it in their core business operations. This approach
assumes LC has a negative impact and does not necessarily look
at the business benefit that can be derived from it. If certain
conditions are met, LC can shave off costs in a tight situation.

9. (i) Key features of local content
What is ‘local’?
• Spatial dimension : is ‘local’ related only to the geographic
proximity of the mine or does it have a national dimension?
• Ownership or indigenization: Share of capital or types of
businesses to be owned by nationals of a country;
What is ‘content’?
• Local employment at different stages of the VC and different
competencies
• Max. local procurement and preferences
• Share of value addition and optimizing linkages
(forward, backward and lateral)

10. (ii) Where are the opportunities?
For the mining industry, essentially upstream
We can look at it from a supply chain perspective and in terms of
other key factors of production that are needed to enable
production (such as labour)
For the resource sector as a whole:
Opportunities can be downstream and sidestream, provided
conditions are met. Not automatic; resource-specific; depends
on a host of factors (infrastructure; energy; comparative
advantage; level of industry’s integration in GVC, capabilities
etc) – beyond the scope of the presentation.

11. LC opportunities depend on the stage at which the industry is in the
mining cycle
Site construction phase is more labour intensive, but short-lived
and temporary;
Operation phase more capital intensive but with greater and more
sustainable potential for the supply of goods and services
ECDPM Page 11
Source: ICMM

12. (iii) Upstream opportunities during production
phase: cost spending scan
Source: McKinsey, 2013
Average cost spending

13. ECDPM
Substantial (potential) contributions thro’ employment, skills dev’t & supply
chains. Companies spend between 40 - 80% of revenue on procurement of
goods & services (in some cases that exceeds tax & royalty payments).
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14. Page 14ECDPM Source: Tordo et. al (2013)
Oil and gas sector

15. Page 15ECDPM Source: Tordo et. 10 (2013)

16. (iv) Identifying critical gaps between LC goals
and countries’ capabilities
1. Gauging critical competency gaps is important for
employees productivity and to design appropriate support
(training, skills upgrading etc)
2. Identifying existing local suppliers and their capacity to
meet the requirements of the company in terms of quality
and standards; delivery lead time; price competitiveness;
Stimulating entrepreneurship for future suppliers breeds
innovation and creativity.
1. Identify logistics constraints that may add up to costs:
energy; infrastructure; administrative red-tapes;

17. 3. Partnership is key!

18. (i) What governments and companies
can define together
ü The objectives to achieve. These should be specific,
measurable and realistic. Targets are necessary but must be
flexible and adaptable to contextual circumstances. Incentives
are equally important to get the buy-in of companies
ü The pathways to achieve the set goals, with clear roles for
each partner. Effective coordination and communication are
critical at that stage.
ü A mechanism to monitor progress and to adjust to
unexpected challenges. This requires flexibility, on both sides
ü Agree on targets for each partner. Too often governments
and companies pass the ball on each other when it comes to
demonstrate success

19. (ii) What governments can do:
1. Success depends on what you want to achieve – policy
targeting is key. The first imperative for policy makers is
to gain detailed knowledge of their resources supply chains so
that they know exactly where the value is, and what benefits
they can realistically get, given their economic situations
1. Master the country’s competitive edge
Benefits that can be captured locally depends on number of
factors: (i) the type of resources; (ii) the level of
industrialization; (iii) a country’s unique aspects such as
location, language etc. Some factors of production can be
easily localised (eg. manual and low-skilled labor and basic
materials); others require significant industrial adjustments.
Governments must therefore develop those capabilities.

20. 3. Carefully assess the opportunity cost of regulatory
intervention
Assess whether regulations would unnecessarily raise costs and
damage the competitiveness of extractive companies is critical.
They also need to ensure that :
Ø Business environment is conducive (remove hidden costs of
doing business)
Ø Regulations do not create perverse incentives (picking
winners)
Ø Are compatible with trade and investment commitments;
4. Regulation is necessary but enabling is essential.
Provide access to finance; provide red carpets, not red-
tapes; support SMEs; provide requisite infrastructure; intra-
govt coordination to ensure policy coherence
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21. (iii) What businesses can do
1. Local content is a business case, not just a compliance or a
CSR issue: include it in your core business as it can bring
cost-savings across your supply chains (lower staffing costs;
avoid currency fluctuations, save taxes on imports etc);
1. Participating in economic diversification can provide you with
significant negotiating advantages for future licences or
projects
1. When well managed, LC can improve the relationship with
local governments and reduce risks of social tensions.
1. Most importantly, manage expectations of what businesses
can or cannot do. Success can only be achieved if you remain
within your economic sphere: “the business of business is
to do business”

22. 4. Therefore be clear on your capacity to contribute and
what you would need governments to do to allow you to
succeed. It takes two to tango and risks must be shared.
4. Measure performance together, including that of
Government. Targets must be set both ways, as the
success of one depends on the other

23. 4. Conclusions
1. No sustainable development path without industries. LCPs are
key to stimulate entrepreneurship and development of PS.
2. But not an end in themselves. Must be viewed as part of
broader industrial strategy and with a new mind-set.
Certain conditions are necessary.
3. Clear definition and objectives of LCPs is fundamental &
should be very clear: otherwise difficult to monitor results;
4. Effective LCPs require holistic approach: should be well
targeted, flexible and adaptive and need to assume politically
difficult trade-offs.
5. Successful policies pointed to the importance of a balance
between regulatory measures and the need to safeguard the
competitiveness of the industry.
6. Finally collaborative partnerships is paramount:
Government is a strong actor, but in the end, the business is
conducted by the PS and without their buy-in and support,
difficult to have sustainable results.

24. Thank you
www.ecdpm.org
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