Economic Linkages in the Extractives Sector

5. Key challenges

Identification of linkages

While it is relatively easy to identify production linkages, it is not very easy to verify whether horizontal linkages occur (i.e. where skills are transferred from the extractives sector to other sectors). Identification of sectors most likely to benefit from diversification requires a robust study which considers global competition, carbon constraints and the sustainability of these linkages. Some companies may argue that identification of local content and skills are too difficult and using local resources would comprise the project’s quality.

Mozambique’s linkages identification and formation experience are a good example of the promotion of linkages between large foreign investments and SMEs. In 1998, Mozambique initiated the world’s most advanced aluminium smelter construction, the MOZAL project. Initially, MOZAL could not identify any linkage opportunities as the local capacity was considered too low and there was no inter-firm enterprise base for local companies. However, when the project was being expanded in 2001, under the SME Empowerment Linkages Programme, Mozambican firms were trained and became the most capable candidates in MOZAL-II bidding. The programme also facilitated construction of a national park and the investment spilled over to gas and beverage sectors.

Capacity to absorb

A shortage of human resources skills and capacity to absorb the potential of linkages opportunities in extractives may be a constraint in many resource rich developing countries. Establishment of vocational and industrial training prospects could be done in multiple stages, from identification of skills gaps and then creation of excellence centres locally. For instance, to tackle the shortage of skilled Congolese workers in the oil sector, the Government formed a partnership with Total E& P Congo to create a master’s degree programme in oil engineering and geology at the Marien Ngouabi University (Brazzaville). The partnership also created the National School of Polytechnic Studies, as part of implementation of the Moho Nord project. Total E & P Congo also hosted a training centre for industrial maintenance at the Higher Institute of Technology of Central Africa. In the mining sector, a presidential decree created two institutions in Democratic Republic of Congo to conduct research in the sector: The Geological and Mining Research Centre and the Centre for Expertise, Evaluation and Certification of Precious Minerals.

Capacity to negotiate contracts with international companies is also a main driver of achieving broad-based linkages to the economy. Local empowerment and local participation in negotiations may benefit from enhancing local linkage development. This said, linkages could be established beyond individual nations, identification and the promotion of regional integration that could allow the non-extractives sectors to benefit from economies of scale.

Fostering technology transfer from global companies to the local communities is a key element in constructing capacity to absorb linkages developments. Acquisition of technologies and investing in research and development could be very costly for new resource rich developing countries. Capacity to absorb requires high skilled training and access to higher education but this could only be achieved where there is a system providing sufficient baseline education, in this sense, policies ideally should stretch to primary education. Human resource development also requires a multi-skilled approach in the extractives sector from governance to business performance and implementation capacity.

Capacity needs to be developed and broadened in the implementation of existing policy instruments in a manner that supports national industrialisation strategies. For instance, Zambia explicitly refers to economic diversification in its Sixth National Development Plan however, diversification does not yet prominently feature according to the  Zambia Mining Investment and Governance Review, which reports that ‘mining plays a disproportionately large role in the national economy; efforts over the years to diversify the economy have had limited impact’.

Formation of linkages takes time

Target setting and their incorporation into development plans is important. However, it is also important to acknowledge that establishment of linkages may take a long time to realise. For instance, in Nigeria, it has taken a decade to enforce legislation on local content policies. During this time, the policy and legislation have been amended multiple times, downsizing the initially ambitious local content targets. Today, the legislation is implemented in a strict fashion and companies with higher local content rates are given priority in contract negotiations. Regional cooperation could accelerate the development of large scale industries such as chemicals, plastics and smelting. Careful planning of location advantage and aspects of consumer linkages could also facilitate the elimination of longevity constraints.

International law

International trade treaties such as the World Trade Organisation’s Agreement on Trade-Related Investment Measures (TRIMs), the Agreement on Subsidies and Countervailing Measures (SCM) and the General Agreement on Trade and Services, as well as bilateral investment agreements (BITs) signed by host states, can pose some barriers to creating linkages. WTO agreements can make it difficult for host governments to incentivise downstream processing at the national level. There are over 3,000 BITs worldwide. Most of these provide clauses that prohibit favourable treatment of local products over foreign ones. Some of them can even pose constraints on technology transfer and local research and development programmes. Governments may benefit from seeking legal advice before signing such international investment and trade agreements to make sure they are in line with national policies and sustainable development strategies.