Approaches and lessons learnt

Isabelle RamdooECDPM

19 January 2016Astana

Local content policies in the mining sector

• No agreed definition for ‘local’ and ‘content’

• Interpretation is therefore broad and flexible

• All resource-rich countries have, at some point, implemented local content policies. 90% of resource-rich countries have some forms of local content policies, and in general rules-based (hard policies)

• As their economies and industries evolved, their approaches to local content evolved as well. Countries get more ‘creative’ but measures don’t disappear

• Case studies on different approaches to local content show there is no blue print. Certain conditions must be there for policies to succeed and local content policies must be time bound and monitored to ensure they meet their objectives

1 Introduction

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a. Government-led initiatives2. Different types of measures…

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Regulatory requirements Incentives

Mandatory: Based on quantitative requirements (numerical targets in volume or value) orQualitative requirements (such as reporting, information sharing, contract unbundling etc).

Government acts as a facilitator and provides incentives, in the form of financial support (loans on favourable terms) or tax rebates, provided companies meet certain local content objectives

Best efforts: Requires ‘preference’ to be given, but without specifying target or timeline

Horizontal: applies not only to mining sector but to economy in general (clusters; corridors; R&D efforts; training)

Monitoring mechanism: more or less stringent and compulsory

Specific to the mining sector: some facilities may be provided on the proviso that the company ‘buys local’ (e.g. Australia); or invest locally (Finland)

Examples of requirements

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• Initiatives taken by companies to support local supply chains or to employ local labour: Eg. South Africa (Zimele); Brazil (Innove); Mozambique (Mozal)

• Often framed in ‘CSR’ policies, but are in fact, increasingly linked to their core business.

• Good examples in Brazil, South Africa, Chile, Australia where mining companies undertake to facilitate procurement for local companies, for example, by unbundling contracts, publishing tenders, giving more time for SMEs, helping SMEs to meet all the criteria to supply the mine. Also good examples regarding training and capacity building (where mining companies enter into partnerships with research institutions) to help local people take up jobs in the mine, at various levels of competencies.

b. Industry-led initiatives

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• In our case studies we also found that in cases where mining activities interact with indigenous communities (Canada, Australia, Peru, Brazil), specific agreements with those communities led to very specific support to local content – mainly suppliers development and workforce.

• The nature and context of these agreements are very specific, but they give good insights on the alignment of interest between local communities and mining companies. This is seen as an ‘inclusive approach’, where the local communities negotiate directly with the mining industry. These types of partnerships have delivered positive results in many cases.

• Success when: Partnership based on trust, common goals are set (sustainability of the regions beyond the mine); monitoring mechanism is rigorous and process is adaptable;

C. Initiatives led by local communities

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CASE STUDIES

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3 groups of countries, based on some similarities (with many differences) in:

(i) Their economic structures (relative importance of the mining sector; advanced v/s developing v/s LDCs; maturity of the mining industry)

(ii) Their priorities and policy orientations (is the priority revenue generation? employment? Business development? Global positioning?)

(iii)Their policy choice : mainly regulatory? Incentives? Mix of both? Partnerships with mining industries? driven by communities?

INTRODUCTION

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ADVANCED ECONOMIES

The case of Finland, Australia and Canada

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Australia and Canada: Mining industry is key (but due to diversified economy, does not reflect highly in GDP).

Finland: Industry declined and almost disappeared. Return on the mining industry recently

All three countries are advanced economies, with very competitive industries, but also excellent and world class suppliers of equipment and services, technology advanced economies; etc.

Their ‘local’ companies are internationalised and are at the forefront of innovation, R&D and technology leadership worldwide;

Their industries developed at a time where there were little international restrictions to grant preferences, subsidies and protection

They are well equipped with mining-related skills, competencies and capabilities;

(I) THE CONTEXT

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1. Maintain and support the competitiveness of national suppliers

2. Maintain technological leadership (Finland has an investment programme of a budget of €30 million to provide financial support to achieve this objective)

3. Position themselves as ‘global’ hubs (e.g. Australia’s Mining Equipment, Technology and Services – METS) and ‘solution’ providers when complex and specific technical expertise is required (Finland expressly mentions this)

4. Internationalise their companies, to access markets to develop those services in other resource-rich countries (Australia and Canada are very active in Africa)

5. Local employment and procurement remain a priority but more ‘localised’, to respond to context-specific needs – indigenous population – dealt with at State level

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(II) POLICY ORIENTATION AND PRIORITIES

1. Incentives-based approach: Australia: Industry Participation National Framework guiding overall objectives: strong emphasis on technologies, partnerships in global supply chains, innovation and market access. Funds provided to facilitate linkages among companies and increase SME participation in supply chains (a Buy Australia at Home and Abroad Act was even passed between 2011-2014 to support this). An institutional structure was created to link suppliers to major projects;

Finland: A €30 million investment programme to provide financing and loan guarantees to companies to encourage suppliers development; Tekes (agency for innovation) finances investment in education and R&D to support skills and capabilities devt;

Canada: Incentives given to boost R&D and regional economies. Special tax incentives and support programmes given for innovation in SMEs. Some provinces provide incentives so companies relocate their R&D or create clusters efforts to create spillovers

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(III) WHAT APPROACHES?

2. Regulatory approach: mix of hard and soft policies

All 3 countries have regulatory frameworks with clear objectives:

Australia: Jobs Act 2013 – sets out obligations for large projects where companies should give local suppliers ‘full, fair and reasonable’ opportunities to bid for tenders; where mining companies should support local suppliers by providing them with training; information about opportunities and integrate them in their supply chains. This is taken further in State Agreements, in particular where strong indigenous populations are present. Frameworks can be very specific and quite ‘hard’, although numerical targets are not fixed. The reporting mechanism makes them almost compulsory.

Same in Canada, the Benefits Agreements go very far in setting priorities and commitments for First Nations with strong LCRs that bind companies to certain obligations, in particular regarding employment and business development.

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DEVELOPING ECONOMIES

The Case of Brazil, Peru, South Africa, Ghana, Papua New Guinea

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All five countries: Mining industry is key GDP contributor (sometimes the most important one like in Peru, Ghana, PNG) ; countries export essentially untransformed raw materials (although SA and Brazil have strong suppliers networks); Mining is a mature industry;

All five countries are developing economies but with still numerous challenges: unemployment is high and rising; perception is that the mining sector did not contribute enough (resource curse argument); business climate still stiff; skills and capabilities challenges; countries highly dependent on exports of minerals and therefore vulnerable to price shocks.

Governments have taken political decisions to diversify economic structures, notably by leveraging the mining sector for better economic outcomes

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(I) THE CONTEXT

Five very different countries, but some common denominators:

1. Focus is on linkages development both upstream and downstream (in Peru and Brazil less strong than in South Africa, Ghana) and industrial development and economic diversification;

2. Focus is clearly on employment and higher levels of local procurement to develop local supply chains, with a particular attention to SMEs (e.g. part of industrial plan for Bigger Brazil; New Growth Path in South Africa etc). Other key issues include ownership, transfer of technology, training etc.

3. Focus is to address historical problems – essentially in South Africa, but to a lesser extent in Ghana (where the objective is to develop and use ‘Ghanaian’ expertise as opposed to ‘foreign’ expertise). In Peru, Brazil, PNG this is linked to the localisation of the mine (indigenous population)

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(II) POLICY ORIENTATIONS

Essentially placed in regulations, with a mix of numerical targets and best efforts + partnerships. South Africa: stands out as being the most complex and regulated one;

Ghana: recently reviewed its mining law. Introduced numerical targets

Peru: No numerical targets. Rely on best efforts of companies

Brazil: No specific requirements for suppliers or contractors. However, it has developed very good partnerships with its mining industries, to support capabilities, SME development and skills development, so local companies can participate in procurement bids.

PNG: LCRs embedded in Benefit Sharing Arrangements at the project level, between mines and communities

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(II) WHAT APPROACHES?

South Africa: a ‘scorecard’ has been developed that specifically target historically disadvantaged population: very specific targets have been set as follows to be achieved within a specific timeframes

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Element Target (in 5 years)

Ownership (equity participation) 26%

Procurement and enterprise development: Capital goodsServicesConsumables

40%70%50%

Employment: Top managementSenior managementMiddle managementJunior managementCore skillsWomen

40%40%40%40%40%10%

Human resource development expenditure as a % of total payroll 5%

The case of Ghana

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Element Requirement

Employment requirements

Unskilled labour Reserved for GhanaiansSkilled labour 10% skilled labour may be expat in first 2 years. Then all skilled

labour to be Ghanaians (during exploration phase)For mining operations: maximum 10% foreign labour in first 3 years. After this period, maximum of 6% foreign labour

Quota for expatriate employment

Working permit and permission will not be granted unless no Ghanaians can perform the job. Exceptions made when specialised technology needs to be used or Ghanaians not fully trained.

Procurement requirements

Specific categories of procurement reserved for local suppliers

A list of 8 products have been identified in the short term. The list is expected to be expanded overtime (based on a thorough analysis)

Preference when assessing bids

Tenders with highest level of Ghanaian participation in terms of ownership and management must be selected when bids are within 2% of each other on price.

Reporting requirements

Obligation to provide procurement plans

Companies must provide procurement plans to report on progress on use of local content. Financial fines in case of non-compliance

LESS DEVELOPED COUNTRIES

The Case of Mozambique and Liberia

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Mozambique and Liberia are LDCs: among the poorest countries in the world; both post conflict countries that suffered decades of civil war. For this reason, although mining is not a ‘new’ activity, at large scale level, big investments are fairly recent.

Mining endowments are HUGE and the investment that may flow in (if commodity prices pick up) will be enormous – beyond anything those countries have managed so far. At the same time, making them highly dependent – c.f. price slumps = economy slumps

Recent policy reforms: In Mozambique, new law in place since 2014 (first one was in 2002); in Liberia, Mineral law of 2000

Mining expected to be the main economic driver for the next decades (commodity price?!?!?!) (other economic sectors are nascent or informal), so political attention and expectation are very high.

(I) THE CONTEXT

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As LDCs: focus is to get as much revenues as possible. They see mining as (i) a financial asset (fiscal and investment); (ii) as an economic assets – jobs, economic opportunities for local businesses; (iii) as a means to support community development (In Liberia: the concessionaire ‘shall provide free primary and secondary education’ and ‘pay the cost of education facilities’ if they have substantial operations in a region);

So far, Mozambique and Liberia put a lot of emphasis on attracting investment : fiscal considerations etc. A lot of announcements on local content, but they have not gone far in putting these strongly in legal frameworks.

Mozambique recent legal reviews have strengthened LCRs, but remain quite to the best efforts of companies.

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(II) POLICY ORIENTATION

Mozambique: 2014 Mining Law:

Preference for local sourcing to Mozambican companies; all opportunities must be published; Foreign service providers must ‘associate with Mozambican entities’. No numerical targets.

Employment: Priority to be given to Mozambicans; foreign labour only if competencies are not available in Mozambique. No numerical targets. All job vacancies should be published;

Equity participation: Participation of Mozambicans in the share capital between 5 – 20% of equity capital. Listing of companies on stock exchange to facilitate this;

State participation: State will have a free carry participation of at least 5% of the share capital.

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(III) WHAT APPROACHES?

Liberia: Detailed Mineral Development agreements, which require:

Education (basic + scholarships); training of staff and in particular area of expertise (administrative and management);

Employment: unskilled labour exclusively reserved for nationals; For ‘skilled, technical, administrative and managerial positions’ preference to Liberians; Senior management is up to companies. In some DAs, there are numerical targets to be achieved within a certain timeframe

Technology transfer policy: during technical operations, up to 2 geologists, engineer etc to participate in technical aspects

Local procurement: First preference, based on equality of quality, delivery schedule and price to Liberian providers. In some DAs, investors must ask their contractors and sub-contractors to also work with local suppliers;

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Big challenges still to be addressed:

Complementary institutional support to build skills and suppliers capacity still lacking. Levels of basic education is very low; ripple effect on skills and professional capabilities; health (Ebola crisis put Liberia to a stop for almost 1 year)

Business environment is very stiff and complicated, which drives up the cost of doing business

Lack of ‘private sector’: in Mozambique and Liberia, most private operators are small and informal. Large operators are foreign companies. Lack of support to SMEs (finance is a big issue)

The lack of infrastructure is a major impediment for suppliers’ development;

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LOCAL CONTENT AND INTERNATIONAL REGULATORY FRAMEWORKS

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One of the reasons why countries have adapted their approach to local content, moving away from quantitative restrictions over time, is because most of the quantitative measures are no longer permitted by the WTO.

Countries, members of WTO, have certain obligations (like national treatment). For instances, the following measures are prohibited:

Quotas related to local sourcing (as per TRIMs Agreement); Preference for local substitutes to stimulate domestic industries

(NT); Some employment requirements (e.g. local employment targets,

maximum number of expatriates; national participation in management) are prohibited if a country has taken commitments under the services agreement (GATS) to liberalise a sector.

Some flexibilities for developing countries.

THE CONTEXT

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• In addition to WTO commitments, countries who enter into free trade agreements (FTAs) or who sign bilateral investment treaties (BITs) may sometimes further reduce their policy space.

• BITs in particular, increasingly prohibit performance requirements and most forms of local content requirements, meaning that countries can no longer use those policies to develop their local industries or to increase labour force participation in the mining sector

• The cost of disputes, in particular under BITs, can be very high in the case of breach of commitments. Investors can take countries to dispute and seek financial compensation for damages caused.

• No flexibilities under FTAs and BITs.

FTAs and BITs

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CONCLUSIONS

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1. What is your policy objective? What sort of local content are you trying to maximise? Employment? Procurement? Equity participation? Maintain competitive edge?

2. Why are LCPs needed in the first place? What sort of market or policy failure are you trying to fix?

3. What would be the political and economic considerations in the absence of LCPs? Depends on the level of expectations that the mining sector has created in a country

4. What is realistically achievable and in what time frame? This will depend on (i) levels of economic development and maturity of the mining industry; (ii) the quality and scale of resource endowments; (iii) the levels of capabilities in countries; (iv) the business environment etc.

Key considerations in choosing the approach

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5. What types of opportunity costs are you willing and prepared to accept?

6. Who takes the initiatives? Government? Private sector? Communities?

7. International factors: global demand; commodity price cycle; commitments (WTO, FTAs and BITs tend to reduce the policy space of countries to put in place local content policies.

To conclude:

• There is no blue print as to the type of approach that works best;

• Countries usually adopt a mixed approach, by putting in place regulatory frameworks and by giving incentives.

• Certain conditions must be fulfilled for local content policies to work. For example, in the case of employment, capacity gaps needs to be filled, local labour must have the requisite skills and training.

• Otherwise, the risk is that measures will hurt the functioning of the mining industry;

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• Similarly for local procurement: local companies must operate in a conducive business environment and be competitive in price, quality and delivery.

• Experience have shown that putting in place local content policies is a long term process, that requires constant adjustment. Measures need to be time-bound and implementation as well as impact must be carefully monitored, so as not to affect the competitiveness of the industry.

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Thank youwww.ecdpm.org

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