How local content policy in mining can stir growth

09 Feb, 2020 - 00:02 0 Views

The Sunday Mail

Talking Success
Sifelani Jabangwe

In my last instalment, I tried to make a case for leveraging on public procurement as a tool for industrialisation since Government is the largest buyer of goods and services.

Local content policies focus interventions on areas of high procurement and aim to direct the sourcing of those goods to local enterprises.

Zimbabwe launched the local content policy in order to stimulate local industry, especially after noting that the country imports goods worth US$6 billion annually yet the economy has not been doing well.

Local imports are relatively higher than those of comparator countries. Thus, there is an opportunity of leveraging procurement using local content strategies. The gross procurement of the mining sector is one of the highest in the local economy.

Therefore, applying the local content strategy to this sector could significantly impact on the rest of the economy. Resource-rich economies in the developing world tend to suffer from the resource curse or Dutch Disease, where other productive sectors fail to grow due to a disproportionate focus on the extractive industry.

However, there is need to maximise benefits from the sector. For example, the country might be the third-largest global exporter for platinum and significantly contribute to global gold, diamond and chrome supply, but the returns — as reflected by economic performance — do not reflect such global performance. This is also the case for Morocco, which is the third-largest producer of phosphate; DRC, the seventh-largest producer of copper; Mozambique, the fifth-largest producer of graphite; Nigeria, the sixth-largest oil producer.

When value added these minerals contribute billions to global trade.

Clearly, countries importing these minerals are more prosperous than those exporting them.

Maximising returns from these minerals lies in promoting both local procurement and value addition. Well, value addition is a story for another day. Mining revenues have been averaging US$2,5 billion annually, and growing.

But locally produced goods supplied to this sector have been considerably low.  In developing countries such as Norway, Canada and Australia, there are well-developed local supply linkages for the mining sector. Such a structure ensures that a significant portion of mining revenues is spent and localised in economies where the resources are sourced.

A look at the structure of the statement of comprehensive income of a mine shows that profit is only but a small portion of revenues.

Assuming that gross profit is 10 percent, this implies that 90 percent of the revenues are used to pay the costs of mining. Against local mining revenues of US$2,5 billion, this would imply that an estimated US$2,3 billion would have been paid out for consumables, services, labour, power, etcetera.

Essentially, it means a net outflow of US$2,3 billion from the economy. Other than labour and power, the bulk of the inputs are imported.

Most employees in the sector earn average wages, while new mines being developed are highly mechanised. The mining value chain starts in exploration, then mining development, actual mining and processing and perhaps some level of beneficiation.

The mine requires financial services, legal services, transport and logistics, engineering services, consumables and labour. In South Africa, the development of local suppliers has helped engender renowned service providers in the industry. For Zimbabwe, strong mining linkages mean resuscitating or establishing new support companies especially in areas around mining towns.

African countries are increasingly pushing for increased local content in mining as a way of implementing resource-based industrialisation. This is largely achieved through supplier development programmes that create partnerships between the mines’ local suppliers, financiers and governments. Jobs created from these direct linkages further create additional jobs through employment multipliers.

In Zimbabwe, linkages are still fairly weak as high annual growth rates in the mining sector since 2009 have not translated into material benefits for local industry. Some players in the platinum and gold sectors have started working on supplier development programmes — through the Joint Producers and Suppliers committee of the Chamber of Mines of Zimbabwe — but the pace needs to be accelerated.

Lessons drawn from prosperous resource-rich countries are that the state plays a critical role in encouraging and deepening linkages through the carrot-and-stick approach encapsulated through a well-thought-out policy framework.

The UK used discretionary licensing and strict audits to ensure compliance and development of local suppliers. Furthermore, it strongly supported transfer of R&D (research and development) capabilities and encouraged joint ventures with domestic players to facilitate knowledge and know-how transfer. Norway emphasised value addition and building of local competencies.  Local content in the UK is expected to be 85 percent, while in Norway local content for operations is expected to be 90 percent.

Effective local content policies assist mining companies to acquire social licences from local communities as they will be seeing the benefits from the mining accruing to local communities.

This is a clear low-hanging fruit which needs to be supported by clear policies.

It also requires commitment from Government, those leading in the mining sector and other sectors that stand to benefit. This can significantly improve industrialisation, job creation, economic growth and stability. To be as prosperous as others, we have to do what they have done to get where they are. Simple!

 

Sifelani Jabangwe is the immediate-past president of the Confederation Zimbabwe Industries (CZI). He is the current chair of the local content committee.

 

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