Increasing local content and participation in Africa’s mining sector
History bears witness to the centrality of the mining sector in driving growth and economic transformation. The 1886 discovery of gold in the Witwatersrand basin and how it drove the growth of the South African economy is often touted as an example of the transformative potential of Mining. So too is the discovery of diamonds in Botswana, which has seen that nation develop into a middle-income economy.
Indeed, in many resource-rich countries, the mining sector is a key driver of economic growth. This is a result of large investment inflows and revenue generation largely driven by exports.
Africa’s natural resource deposits are enormous, with many African countries depending heavily on the mining and energy sectors for sustainable development. According to the Policy Center for the New South’s May 2021 Policy Paper, as of 2019, minerals and fossil fuels accounted for over a third of exports from at least 60% of African countries. Additionally, 42 out of 54 African countries are classified as resource-dependent, with 18 countries classified as dependent on non-fuel minerals, 10 as dependent on energy or fuel exports, and the rest as dependent on agricultural exports. Mineral resources contribute a significant amount of fiscal revenues, foreign currency reserves, and employment to African countries.
Clearly, the mining and natural resources sectors are critical to economic growth and development on the continent. The demand for Africa’s minerals is bound to increase as the world transitions to renewable energy sources. This is due to the fact that the continent has many metals and minerals needed for the clean energy revolution.
This notwithstanding, the continent does not have a great track record when it comes to leveraging the potential availed by its resources for industrial development and economic transformation. Many have attributed this largely to the lack of local content and local participation in Africa’s mining and energy sectors. Mining and other extractive industries are unique in that they utilise the natural endowment of the nation to produce commodities for monetary gain. Economic theory posits that such industries ought to pay an “Economic Rent” to the nation for the privilege of utilising this national endowment. It is in pursuit of an equitable share of this Economic Rent that many governments have included local procurement and local ownership provisions in their mining legislation. Local content policies refer to policies which seek to increase the percentage of a mine’s capital expenditure and/or operating expenditure which goes directly to local companies. This is distinct from local ownership policies, which seek to ensure that a percentage of the equity in mining enterprises is owned by locals. An example is what pertains in Botswana where there are regulations that reserves certain trades for its citizens.
Research across the continent shows that the drive to adopt local content policies is driven by two forces. First, is pressure from local communities who feel that they are missing out on the benefits of “their” natural endowment. Second, is pressure from fiscal authorities who see companies enjoying windfall profits in times of commodity price boom, without a proportionate increase in fiscal collection. On the contrary, many mining projects are beneficiaries of fiscal dispensation, which provide them with some tax shields. These factors, in an environment where equity ownership of the mines is mostly foreign, have seen an increase in resource nationalism across resource-rich nations.
The literature on mining on the African continent says that approximately nine out of ten resource-rich nations implement some sort of local content policy in employment, domestic involvement in material processing, or other forms of economic investment. For instance, South Africa’s 2018 Mining Charter has local procurement requirements that mandate 70 percent of total mining goods procurement spending should be on domestically manufactured goods. In Ghana, local content and local participation requirements are not novel to the mining sector. They exist in various regulatory instruments. However, with the introduction of the Minerals and Mining (Local Content and Local Participation) Regulations, 2020 (LI 2431) (Local Content Regulations) in December 2020, we have seen a consolidation of the existing requirements and the introduction of additional requirements.
The Local Content Regulations provide require minerals license holders to create a localisation program for the recruitment and training of Ghanaians and imposes quota limits on expatriate hires. It also establishes requirements for the procurement of local goods such as explosives, electrical cables, cement, and services that support the mining industry (including R&D, technical and engineering services, insurance, accounting, legal, and financial services as well as security, transport, fuel provision, etc).
If these policies are properly consummated, the idea is that the extractive sector would act as a catalyst for the development of other industries and services around it. In order for these policies to bear fruit, it is incumbent on Ghanaians to develop the expertise required to provide the listed services competitively as well as to develop the industries which would produce the listed goods. Without that, the mines may procure locally but the suppliers themselves would have imported the goods, which defeats the purpose of the legislation.
On January 1, 2023, the fifth edition of the Ghana procurement list associated with Legislative Instrument 2431, was published, and immediately went into force. This revision expanded the number and type of goods and services that companies operating in Ghana’s mining sector must buy from local Ghanaian companies. It also expanded ownership share requirements for companies providing many services. As important as local content policies are in the energy and mining sector, in some cases, the local content requirements have demanded unrealistic levels of indigenous participation without other ancillary policies to enable such participation. In some countries, this has resulted in supply-side bottlenecks and increased the cost of projects. Legislation is typically focused on requiring mines to procure locally without paying much attention to the legislative and fiscal framework that would create an enabling environment for local suppliers to flourish.
In many instances, there is policy discord between the Local Content Regulations and fiscal policies relating to corporate tax and import tariffs, which result in it being easier and cheaper for suppliers to import the goods rather than attempt to manufacture locally. The solution is, therefore, not to continuously increase the legislation of local content requirements on the mining sector, but to rather focus of unlocking the impediments which are holding back local industry.
Local content legislation can effect positive change in numerous contexts, but it must be carefully designed to avoid unintended consequences. Evidence abounds across the continent on how enactment of local content laws and policies do very little in lifting citizens out of poverty. To enact effective local content policies, it is essential for governments and firms to consider how to develop and unlock the industrial and technical capacity required. Governments also need to be alive to the broader geopolitical forces at play, so as not be used as mere pawns for the development of others.
Africa has to rise and increase the level of local content in its extractive sector. Without that, Africa will continue to miss out on the full benefits of its natural resources, and will fail to capitalize on the opportunity presented by its mineral abundance. Having said that, this needs to be done in a responsible and coordinated manner which does not kill the goose that is laying the lithium egg.
By Tim Mugodi
Source: GNA