Ethiopia: Growth By Extraction

18th January 2016

ANALYSIS

Throughout the price boom of the 2000s, extractive resources (mining, oil and gas) were seen as assets that African governments needed to leverage more effectively for development outcomes. This view has persisted even through the current price slump that began in 2011. Often, however, this concern is seen as a national issue – mineral assets are held by governments on behalf of their citizens.

Is there a regional dimension to exploitation of extractive resources? What is the role of regional economic blocs in the extractive industries, and what are the rewards for integration and coordination in the sector?

I would argue that there is plenty of room for regional coordination, and Regional Economic Communities (RECs) are beginning to notice.

A first strand of integration at the regional level is taking place in the policy and legislative space. One approach is to work towards harmonising legislation to regulate most aspects of natural resource exploitation. The Economic Community of West Africa (ECOWAS) has recently embarked on a process that should culminate in the adoption of a single mining code across the region. In southern Africa, the Southern Africa Development Community (SADC), is taking more gradual steps towards legal harmonisation in the mining sector by adopting common standards (but not necessarily common legislation) to govern the sector.

Should African countries strive for uniform legislation, or for a looser model of common principles and standards?

The rationale for regulatory harmonisation rests on the importance of a transparent and level playing field across countries – a level playing field that will help avoid a regulatory “race to the bottom” and that will encourage cross-border investment. The more uniform the legislative framework, up to the extreme spectrum of a sole mining code, the lower the cross-border costs of doing business. But there is a case for maintaining flexibility while agreeing on common or minimum standards: some of the regulatory differences reflect diversity across countries in perceived risk, geologic endowment and infrastructure development.

In other words, when legal frameworks do not capture country and project level differences, it becomes necessary to adapt them through ad-hoc negotiations of extraction leases and contracts. But project-level negotiations lead to less harmonisation, because some legal provisions are modified in an ad-hoc manner in bilateral deals between governments and companies.

Another important dimension is to use regional integration as an enabler for natural resources to create a platform for industrialisation. The success of extractive policies is seen as the ability of countries to climb the value chain of the extractive industries by increasing their “local content”, either by developing a local industry supplying the extraction process (upstream or side-stream linkages), or by encouraging more processing of resources to be done locally (beneficiation). The challenge in developing local content in the extractive industry is one of building enough technological capacity, economies of scale and skills to enter what are very complex supply chains. So far, although total spending on goods, services, and equipment constitutes a significant share of petroleum and mining project costs, only limited local supply chains have developed in petroleum and mineral-rich developing countries.

What is the role of regional economic communities (RECs) here?

RECs, particularly in regions where there are extractive industries in specific commodities in two or more countries, offer an opportunity to provide larger markets to local suppliers, allowing them to successfully anchor themselves to the extractive industries. Crucially, a definition of local content at the REC level is needed.

Under such an arrangement, services from a certain REC supplier would count against local content targets (whether in full or by a scaling factor) in any member of the same REC. This would be a significant step to promote regional “champions”. Ultimately, this coordinated approach would benefit regional economies by allowing more scale to value creation.

However, it would require policymakers to undertake a significant shift in approach – away from “local-local” and “national” views of local content, which are sometimes seen as expedient to provide quick, visible benefits to citizens to justify extraction of natural resources, rather than as a long term strategy for industrialisation. To make this step, policymakers need to be given evidence-based arguments, and crucially, incentives, which lie in reciprocity. This is why a regional local content policy cannot be undertaken bilaterally: it needs RECs to act as brokers and leaders for this agenda.

RECs have also an important role in ensuring that local content provisions are consistent with international trade commitments. By restricting the choice of suppliers to the extractive industries, local content provisions could be open to legal challenge under trade and bilateral investment frameworks. However, developing countries often can benefit from waivers to trade rules when linked to development goals, and when a strong case is made.

There is a clear opportunity for African RECs to play a role in promoting the interests of their member states in trade discussions, to increase individual states’ collective bargaining power and ensure that trade agreements support the development objectives underpinned in local content policies.

The extractive sector also has significant potential to generate skills transfers. Africa suffers from relatively low skills levels, so, when not readily available at country level, it is important to have a pool of competencies that can move across borders to fill the gap. Here, RECs have a significant role promoting the harmonisation of training curricula and of certification across the region; estimating timing and nature of demand for skills at a regional level; and facilitating labour mobility. Investment in research and development (R&D) can also be pooled, with the creation of regional research and technology centres. An over-arching REC-level education and training protocol would be useful to move this agenda forward.

Infrastructure also has a strong regional dimension and significant development gains if well harnessed. In a number of African resource-rich countries, the infrastructure built by resource companies constitutes a significant share of total infrastructure investment. This infrastructure can be built and designed for “dual use” – that is, allowing access to users other than the extractive companies. Typically, agriculture can greatly benefit from dual use infrastructures anchored to the extractive sector.

In general, regional integration is an essential element for Africa to fully leverage extractive resources as a platform for development, as comprehensively argued by the African Mining Vision (AMV). The link can also go the other way: extractive resources can in themselves be a powerful driver of integration, by creating common interests within the continent and offering the rewards to policymakers to overcome narrow national concerns.

Pietro Toigo a Macroeconomist At the African Natural Resource Center (ANRC).

SOURCE: http://allafrica.com/stories/201601191373.html

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