Is the current Local Content Policy (LCP) the answer for our iron ore industry?
The idea of increasing local content for extractives and other natural resource products exported from a developing country has its roots in the 1960s and 70s when developing countries were mainly integrated into global markets through the exports of raw materials while importing higher valued final products from advanced countries. The adverse terms of trade generated a backlash from the former who then adopted policies to increase the value of the final product that was generated locally before export, as one way to improve the terms of trade in their favour. At the same time this was expected to provide greater benefits to the local economy. These backward linkages would stimulate the rest of the economy through employment and other effects. There was pressure on mining companies, for example, to buy more inputs and services, as well as process as much as possible locally. These policies tended to emphasise the supply of inputs in the form of goods, services and personnel, required for the mining process, and or improve beneficiation by greater processing of the ore before export. Although the content of the policies varied from country to country, all tended to impose quotas for local inputs, minimum numbers for management and higher levels in the company, and also stipulated limits on the volume of foreign inputs, personnel and services brought into the country for the mining operations.
That very few countries in Africa apart from South Africa, if any, experienced the major transformation found in South East Asia and parts of Latin America by the turn of the 20th Century is proof that this approach did not produce the expected results.
This form of LCP, focused on the extraction segment (or link) in the value chain for the final products of the ores being mined. The rules and regulations concentrated on the stage where ore was extracted locally before leaving the shores of the country – in short the local operations of the mining company.
While this approach resonated well in the 70s and 80s, and was also good politics then – because it provided an opportunity for Governments to appoint loyalists to senior positions in the companies – for now the changes that have taken place in the global patterns and structure of production call for a nuanced approach. What is now required is a strategy to capture as many links as possible in the supply or value chain of the ore-to-final product, rather than be confined to more local inputs into the extraction stage only, primary production.
For Iron ore, extraction of the mineral is only the first stage in a four-stage process before getting to the final steel product. It therefore accounts for only a fraction of the full value of the final product. Local Content as interpreted now, therefore targets only this small fraction of the value for the final product. The strategic goal of gaining more out of the ore extracted from the soil is therefore lost.
Viewed from another angle, activities related to mineral extraction are highly capital-intensive and Sierra Leone’s manufacturing sector has almost no capacity to supply the equipment and even financial services needed. At best we can play the role of a middleman, procuring, sub-contracting etc; providing jobs for a few who are well-connected. London Mining for example spent over $200 m in plant and equipment before commencing operations, but very little could have been procured locally.
I reiterate that the current calls for Local Content will at best tap only a small part of the value to be created from the ore being mined – the part that takes place in Sierra Leone.
The reality though is that even for that small part, we are not in a position to capture much of the value. For the LCP to make a difference, it must go way beyond quotas of personnel in a mining company or the provision of relatively low value inputs to the value chain, and plan for the capture of more links in the overall supply and value chains for the entire steel industry, both now and in the future.
Finally, we must be careful that a local content policy that is not so intrusive as to affect the efficient management of the company. This will also hurt the country by raising the costs of operations, make the mine less profitable for both the company and the country, and raise our factor costs. It is better for Government to focus on the supply of competitive inputs – training personnel, allowing space for financial services to be available, organizing businesses to be able to compete for bids – than to impose quotas on the companies.
The real target for the country, as stated in the Transformation Conference and in the Agenda for Prosperity, is to obtain optimal benefits derived from the exploitation of our natural resources for the rest of the economy.
The country must think big, plan boldly but carefully, and stay on course for the longer-term goal of maximizing the benefits of iron ore production to the overall development of the economy. The absence of a Planning Commission renders this task difficult, as Government departments, consumed with day-to-day routine do not have the time or maybe the orientation for longer term strategic planning. The sobering reality is that Sierra Leone is a small economy with a very small market and any producer must face international competition to survive beyond government’s tax and other concessions. The Mano River Union with a 40 million population offers more realistic opportunities for producing at a scale that is internationally competitive. That’s the route to follow (subject of another blog).
The country should also be careful that the short-term results that could be obtained by the current interpretation of Local Content do not compromise the long-term goal of diversification of the economy. By focusing on expanding local content for the mining operation we are at best, developing activities in and related primarily to the mining sector, and thus confine us to a mining economy . This is unlikely to have significant spillover effects on the rest of the economy. Eg transportation of ores to the shores by road hardly leads to expansion of transportation of other goods or people to the rest of the economy. This is not to say that local companies should not be encouraged to handle the transport requirements of mining companies. Rather it is to point out that more important are other measures that would yield results to the wider economy than the relative few who would enjoy employment and revenue gains.
Additionally we should be careful that inadvertently, we do not reinforce the current structure of the economy at the expense of diversification. Without diversification we are unlikely to graduate beyond the bottom half of middle-income level and risk remaining vulnerable to the vicissitudes of the commodities markets.
In short, continuing to interpret Local Content in the simplistic terms of merely getting more locally generated value in the extractive process is simply using 20th century arms to fight a 21st century battle. In fact, if existing labour and investment laws are applied in spirit and in form, the tendency of companies to ignore local content would be curbed, without recourse to a new Local Contents Policy. However, this is not enough! To push a Local Contents policy that would yield the fruit we envisage calls for greater attention to the MRU; and now is the time for that. Never before have we enjoyed the political will displayed by the current four Presidents. So we must approach the problem differently, we must think big, think beyond our borders, be bold, but study carefully before we move.