June 2014

1. Leveraging extractive industry investments to create upstream and downstream linkages June 2014

2. Maximizing Linkages from Extractive Industries Source: ECDPM

3. 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.

4. What are the different types of job impacts and are they quantifiable? • Linkages to the extractives sector: how does it work? • Local content regulations • Beyond the regulations, what should be at the core of a government-led policy? • How to diversify a resource-based economy?

5. 3 types of employment impacts and multipliers • Direct: Employing Locally • Indirect: Sourcing Locally • Induced: Spending Locally • 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 “ SPILL-OVER EFFECT

6. About the complexity of reporting job impact through multipliers

7. Generalization about job impact is impossible FACTORS INFLUENCING JOB IMPACT • 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 EXAMPLES 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).

8. 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 ?

9. Improving communication and adjusting expectations

10. What are the different types of job impacts and are they quantifiable? • Linkages to the extractives sector: how does it work? • Local content regulations • Beyond the regulations, what should be at the core of a government-led policy? • How to diversify a resource-based economy?

11. Linkages in the mineral industry Source: Lydall 2010

12. Linkages in the Aluminum Sector

13. Upstream linkages throughout the value chain The higher the processing the more sophisticated the upstream linkage (higher level of r&d, skills…)

14. 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: 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 • 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

15. Impediments to linkages

16. What are the different types of job impacts and are they quantifiable? • Linkages to the extractives sector: how does it work? • Local content regulations • Beyond the regulations, what should be at the core of a government-led policy? • How to diversify a resource-based economy?

17. Implementing local content: under which framework? • Voluntary company scheme • Non-binding framework policy framework – Trinidad, Chile • Legislation – LCStand 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

18. 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)

19. What are the broad categories of LC requirements?

20. Challenge of local content regulations: Problem of definition • 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? • 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? • Due to quality concerns of the mining company, how “competitive” should the local companies be?

21. Avoiding loopholes

22. Challenges of local content regulations • Can a company use its business as usual tender procedure? • Is it sufficient for a company to follow its local content plan drafting at the outset of the project? • 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? • Are penalties efficient to enforce local content provision ? • Does successful local content with the main Contractor ensure local content across the whole supply chain?

23. Avoiding loopholes

24. 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

25. What TRIMs and GATS leave untouched

26. 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: • host countries require some foreign investors to source from certain goods and service providers but don't impose similar requirements on other investors; and • 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.

27. …. 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.

28. Examples of BIT clauses limiting Local Content policy space • Trinidad and Tobago & United States Article VI - Performance requirements • “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.” • Uganda and Sweden Article 2 - Promotion and Protection of Investments • “(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 thereofnor 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.”

29. What are the different types of job impacts and are they quantifiable? • Linkages to the extractives sector: how does it work? • Local content regulations • Beyond the regulations, what should be at the core of a government-led policy? • How to diversify a resource-based economy?

30. Baseline Analysis

31. Upstream linkages over time: Illustration

32. Targets and Timelines • Quantify the commercial impact of different local content targets and timelines • Set targets • Too high – scare away investment, investors accept fines or find loopholes • Too low – not maximizing potential linkages • Carefully develop indicators to measure targets • Headcount • Expenditure • Review and update targets on a regular basis • Determine fines & penalties for non-compliance

33. 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

34. Supporting Local Companies

35. Some examples

36. Coordination

37. OyuTolgoi 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.”

38. 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 ?

39. What are the different types of job impacts and are they quantifiable? • Linkages to the extractives sector: how does it work? • Local content regulations • Beyond the regulations, what should be at the core of a government-led policy? • How to diversify a resource-based economy?

40. 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)?

41. The Product Space Theory Source: Hausmann, Hidalgo et al.

42. Extractive Resources less ‘complex’ & ‘connected’ Chemicals Machinery Electronics Construction Coal Garments Mining Petroleum Source: Hausmann, Hidalgo et al.

43. Whom produces what? Source: Hidalgo et. al (2007)

44. 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?

45. 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

46. 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

47. 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 well-connected 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?