Resources Value Addition

Towards a

Resource-based African Industrialisation Strategy

(RAIS)

Dr Paul Jourdan

Resources Value Addition

Towards a

Resource-based African Industrialisation Strategy

(RAIS)

Dr Paul Jourdan

OM

Presentation Structure

1.Africa’s Natural Resources2.Commodity Prices- Where

to?3.Resource-based

industrialisation– Resource s Linkages: Fiscal,

Spatial, Backward, Forward, Knowledge

4.Conclusion5.Way Forward

OM

Africa’s Natural ResourcesAfrica’s natural (static) comparative advantages lie in its natural resources endowment & potential, particularly:

• Agriculture & Animal husbandry;• Water;• Minerals;• Energy;• Forestry & Biomass;• Fisheries & Aquaculture; and• Tourism (natural endowment-

based).This static advantage MUST be

transformed into a dynamic advantage

OM

Postulation:Africa’s unique natural resource base could

provide it with an important lever to achieve its industrialisation objectives through realising

the resource linkages opportunities (backward & forward).

Alternatively, These assets could be squandered under “free

entry” resource regimes (such as the “free mining” FIFA mineral regimes) and a continued “free market” (non-interventionist) scenario, which is likely to leave the Africa with little

more than ghost-towns (like Kabwe & Stilfontein) with holes in the ground,

desertification & exhausted soils and depleted natural fisheries & forests. OM

Africa has significantAgro-potential

(especially between the Tropics)

OM

Withdrawals by sectorRegion Agriculture Communitie

sIndustries Total % of

total% of internal

resources

  10 6 m³/yr 10 6 m³/yr 10 6 m³/yr 10 6 m³/yr % %

Northern 65 000 5 500 5 800 76 300 50.9 152.6

  (85%) (7%) 18%) (100 %)    

Sudano-Sahelian

22 600 1 200 300 24 100 16.1 14.2

(94%) (5%) (1%) (100%)  

Gulf of Guinea 3 800 1 600 700 6 100 4.1 0.6

  (62%) (26%) (12%) (100%)    

Central 600 600 200 1 400 0.9 0.1

  (43%) (43%) (14%) (100%)    

Eastern 5 400 900 200 6 500 4.3 2.5

  (83%) (14%) (3%) (100%)    

Southern 14 100 3 000 1 800 18 900 12.6 6.9

  (75%) (16%) (9%) (100%)    

Total 127 900 13 000 9 020 149 920 100% 3.8  (85%) (9%) (6%) (100%)   Source: FAO

And water potential…(except for North Africa)

OMAfrica uses less than 4% of its water

Agri-mineral deposits (ex- gas/coal & K)

And has abundant known fertiliser minerals for

agriculture!

Nitrogen sources (oil/gas & coal) &

K resources

But, generally undeveloped for the African market, mainly due to severe logistics constraints.

OM

Africa is well-endowed with mineral resources

Mineral Production ‘04

Rank

Reserves Rank

PGMs* 54% 1 60+% 1

Phosphate 27% 1 66% 1

Gold 20% 1 42% 1

Chromium 40% 1 44% 1

Manganese

28% 2 82% 1

Vanadium 51% 1 95% 1

Cobalt 18% 1 55+% 1

Diamonds 78% 1 88% 1

Aluminium 4% 7 45% 1

Also Ti (20%), U (20%), Fe (17%), Cu (13%), etc.*PGMs: Platinum Group Minerals

OM

African Geology & Mineral Resources

OM

African Geology

Areas covered with recent overburden

(unknown underlying geology)

OM

Africa has diverse energy resources:fossil fuels, solar, HEP & geothermal

potential

And Africa has huge HEP (Congo R: 200GW)

Goethermal Potential:

Great African Rift Valley

Solar Potential: Deserts

OM

Africa also has huge biomass potential.

Giving it large bio-fuels production potential:

(mainly between the Tropics) OM

Commodity (resources) PricesBeyond the US Toxic Assets

Crisis?

Source: IMF: www.imf.org/external/np/res/commod/chart1.pdf OM

1991M011992M081994M031995M101997M051998M122000M072002M022003M092005M042006M112008M062010M010

50

100

150

200

250

Commodity Prices Index (2005=100, IMF)

Non-Fuel Polynomial (Non-Fuel )All Commods Polynomial (All Commods)

Non-Fuel

All Com-modities

Commodity (resources) PricesBeyond the US Toxic Assets

Crisis?

Source: IMF: www.imf.org/external/np/res/commod/chart1.pdf

1980M011982M061984M111987M041989M091992M021994M071996M121999M052001M102004M032006M082009M010

20

40

60

80

100

120

140

160

180

Agri Raw Materials Index ('05=100, IMF)

Agri Raw Materials Index ('05=100, IMF)Polynomial (Agri Raw Materials Index ('05=100, IMF))

OM

Commodity (resources) PricesBeyond the US Toxic Assets

Crisis?

Source: IMF: www.imf.org/external/np/res/commod/chart1.pdf

1980M011982M061984M111987M041989M091992M021994M071996M121999M052001M102004M032006M082009M010

50

100

150

200

250

300

Metal price index 1980-2011

Metal price index Polynomial (Metal price index)

OM

Asian Boom:New “scramble for resources”?

High intensity, sellers market:

Colonial system

Low intensity, buyers market:

stagnation & instability

High intensity,

Africa’s new opportunity?

Steel- good proxy for most minerals OM

How long will boom last?

Steel Intensity

(all metals proxy)

~$16k/capita

Data Source: BHPB 2006

PRC

China + India > 2X pop’n of First World!

2025?

India

However, prices will fall with increasing supply over the medium-long term, but at a higher level (lower grades)OM

Africa

Resource-based Industrialisation?

Maximise the 5 VA resource linkages

5. FORWARDValue-addition: (beneficiation)

Export of resource-based

articles

3. BACKWARDInputs: Capital

goods, consumables, services, (also

export)

4. KNOWLEDGE Linkages:

“Nursery” for new tech clusters,

adaptable to other sectors

2. SPATIALPuts in critical infra-structure (transport,

energy) to realise other economic

potential & intra-regional trade

If the linkages cannot be made, the people’s resources would be best left unexploited- Need to maximise the developmental & inter-

generational impact whilst still extant!

1. FISCAL: Capture & invest of resource rents (RRT) in long-

term economic physical & human

infra (inter-generational)

Use depleting assetsto underpin growth in

sustainable sectors

HRD, R&D

PJ

African Mining Vision

“Transparent, equitable and optimal exploitation of mineral resources to underpin broad-based sustainable

growth and socio-economic development”

Promotion of Linkages1. Fiscal linkages (reinvest of rents)2. Downstream beneficiation & manufacturing3. Upstream into capital goods, consumables and

services4. Spatial linkages (infrastructure, logistics, ICT)5. Knowledge linkages (skills, HRD & R&D)

PJ

Resources provide opportunities for

backward & forward linkages

MiningMineral

ProcessingExplorationSmelting &

RefiningFabrication

expl. capital goods• geophysical• drilling• survey• etc.

mining capital goods• drilling• cutting• hauling• hoisting, etc.

processing cap. goods• crushers/mills• hydromet plant• materials handling• furnaces, etc.

Refining Cap. Goods• Smelters• Furnaces• Electro winning cells• Casters

Fabrication Cap.goods• Rolling• Moulding• Machining• assembling

exploration services• GIS• analytical• data processing• financing• etc

mining services• mine planning• consumables/

spares• sub-contracting• financing• analytical, etc

processing services• comminution• grinding media• chem/reagects• process control• analytical, etc

Refining services• Reductants• Chemicals• Assaying• Gas & elec

supply

Value adding services• Design• Marketing• Distribution• Services

PJ

Resources inputs sector (up-stream) has a comparative advantage in:

1. Relatively large local market 2. Development of techs for local conditions3. National assets: permits for concessioning

with linkages conditionality

The resource curse can be avoided!“Deepening” the resource sector linkages:

development of the resource inputs & outputs industries is critical , but requires the

development of a resources tech capacity!

Finland managed to shift from a 1970 resources (pc) trajectory to a 1998 manufactures (mf) trajectory, through the development of its resources inputs (machinery) and outputs (value-addition) sectors (source Palma, G. 2004)

Finland: e.g. Forestry- grew capital goods

(machinery) & value-added exports (wood

manufactures, pulp/paper)Thru’ investment in R&D!

Finland: 1970 on primary commodities (pc- mining & forestry) inverted U-curve, but shifts to 1998

manufacturing curve (mf- resources inputs &

outputs/beneficiation).

Chile: 1970 on manufacturing U-curve (ISI), but shifts to 1998

primary commodities (mining & agriculture) curve, after opening up

its economy (coup) in the 70’s.

PJ

Finland: The mature forestry industrial cluster 1997a

BACKWARD LINKAGES

1. Specialized inputsChemical and biological inputs (for production of fibres, fillers, bleaches)

2. Machinery and equipmentFor harvesting (cutting, stripping, haulage)For processing (for production of chips, sawmills, pulverization)For paper manufacture (30% of the world market)

3. Specialized servicesConsultancy services on forest managementResearch institutes on biogenetics, chemistry and silviculture

NATURAL COMPARATIVE ADVANTAGE

Abundant forestry reserves and plantations

(400-600m3 per capita)b

FORWARD LINKAGES

1. RoundwoodSawnwoodPlywood (40% of the world market)

2. Wood productsFurnitureFor construction

3. Wood pulp

4. Paper and cardboardNewsprintArt paper (25% of the world market)Toilet paperPackagingSpecial products

Source: Ramos 1998 p111 (CEPAL Review, #68, 12/1998);

a: Generates 25% of Finland’s exports; b: Compared with 25-30m3 per capita in the rest of the world.

SIDE LINKAGES

Related activitiesElectricity generationProcess automationMarketingLogisticsEnvironment industries (paper)Mining (sulphuric acid)

Using a natural comparative advantage to develop a competitive advantage

PJ

Prolong the life of the resources, migrate to exports of resource techs and value-added

products: survive beyond resource depletion!

Oil & Gas Development Strategy:

(Norway: OG21 tech strategy)

>Tech exports

>Gas VA

>resources>recovery

R&DHRD

Extraction ex-linkages

PJ

The foreign resource capital “trade-off”

Resources TNC (DFI) distortions

PJ

TNC Distortion Impact on Africa Solutionglobal TNC purchasing strategies

less likely to develop local suppliers (<backward linkages)

Impose local content milestones

optimise their global processing (VA) facilities

denies local VA opportunities (<forward linkages)

Impose local VA targets

locate their tech development (R&D) in OECD countries

Denies tech development & tech capacity (knowledge linkages)

Local tech development conditions

locate their high level HRD in OECD countries

denies Africa HRD capacity development

Impose local HRD conditions & skills targets

political disquiet on foreign dominance of national assets

Fuels local discontent and xenophobia

Facilitate growth of indigenous resource companies

TNC “core competence” conundrum.

dirt-digging = no linkages

Competitive auctions against linkages realisation

Almost all African Mining Regimes are based on the principle of free mining, or “free entry”. Free mining includes:1. “a right of free access to lands in which the minerals are in public

ownership, 2. a right to take possession of them and acquire title by one’s own act of

staking a claim, and 3. a right to proceed to develop and mine the minerals discovered.”*

The Africa minerals regimes broadly fit into the World Bank’s revision of African mineral regimes from the 80’s till current. “..certain elements of the free mining doctrine that animated the nineteenth-century formulation of mining regimes in the American and British spheres have also guided the liberalisation process of African mining regimes over the 1980s and 1990s. One of the ways this came about was through the retrenchment of state authority, which in turn contributed to the institutionalisation of asym-metrical relations of power and influence that had important consequences for local political processes, local participation, and community welfare.”*

Free mining originated in small enclaves in Medieval Europe but was formalised in California and other European colonies in the 19th century, as a vehicle to promote dispossession & colonisation.

“Free Mining” Colonial Mineral Regimes

*Sources: Barton 1993 & Campbell 2010

But is the wholesale application of this doctrine in the interests of the Africa’s

people? PJ

Extracting Greater Benefits?Beyond “free mining” regimes?

ExplorationTerrain

Exploration LicenseAutomaticity

RoR*/RRT tax

“Mining Charter “type conditions

Knownassets

Unknown assets

DelineationTerrain

Auction on:• Rent share (RRT)• Infra development• Upstream- local VA• Downstream VA• HRD & R&D, tech transfer• Community development

Mining Concession/Licence*RoR: Rate-of-Return

PartiallyKnown

Mineral Terrains

Geo-ReserveTerrain

•Further geo-survey: CGS

•Risk exploration for future step-in rights.

OM

Extracting Greater Benefits?Beyond “free mining” regimes?

ExplorationTerrain

Exploration LicenseAutomaticity

RoR*/RRT tax

“Mining Charter “type conditions

Knownassets

Unknown assets

DelineationTerrain

Auction on:• Rent share (RRT)• Infra development• Upstream- local VA• Downstream VA• HRD & R&D, tech transfer• Community development

Mining Concession/Licence*RoR: Rate-of-Return

PartiallyKnown

Mineral Terrains

Geo-ReserveTerrain

•Further geo-survey: CGS

•Risk exploration for future step-in rights.

1st come 1st served (“free mining”) to add NEW state mineral assets

Transparent & competitive concession: to maximise

development impact

OM

Forward linkages: Critical Industrial Feedstocks

•Manufacturing• Steel• Polymers• Base metals

•Agriculture• Fertilisers (NPK)

•Infrastructure• Cement• Steel (rebar)• Copper

(precious metals mainly only offer fiscal linkages!)

OM

Key Challenges to VA linkages• Requisite Infrastructure

– Transport (road/rail/ports)– Energy – Water – Investment environment– Knowledge: HEIs- Skills development

• OECD et al bi/multilateral accords– EU EPAs & REACH curtail value addition– Kyoto? Doha?

• Technology development– Well functioning R&D required to drive

linkages. Regional approach through:– Networking of R&D Institutions, universities– Joint research & funding – pooling resources OM

Steel is the most important material into manufacturing By value, steel is the 2nd largest global commodity:

Steel

PJ

Steel Demand (uses)

PJ

Steel is followed by Polymers...

(2nd most important feedstock into manufacturing)

PJ

USES OF POLYMERS

PJ

Regional African Steel & Energy Strategies- 1st step?

• Regional integration started in EU with steel & coal (energy)- ECSA;

• Need to be close to raw materials for steel (iron ore & coal/gas) and polymer (hydrocarbons) production;

• High economies-of-scale for steel, petrochems and energy;

• Africa should assess regional steel & energy integration – “customs unions” with compensatory mechs – as a 1st step to full economic integration PJ

Fiscal Linkages: Capturing resource rents

• Resource rents or differential rents are those returns above the “expected” rate of return.

• Resources often embody huge differential rents due to their quality, amenability, location, etc.

• Africa should impose a resource rent tax (RRT) on ALL resource concessions that would trigger in once the expected rate of return is achieved;

• The RRTs should be kept offshore in Regional Development Funds and reinvested in long-term physical and human (HRD/R&D) infrastructure=>

Avoid: Dutch Disease (currency appreciation)Avoid: Industrial Polarisation (bambazonke)Enhance: Equitable regional growth & development

Resource Rent Tax (RRT)

Sovereign Wealth Fund

Regional Dev Funds

Regional Infrastructure

Intra-regional trade & invest PJ

Proving Adam Smith Wrong 240y later?

“There are in Africa none of those great inlets, such as the Baltic and Adriatic seas in Europe, the

Mediterranean and Euxine seas in both Europe and Asia, and the gulphs of Arabia, Persia, India, Bengal, and Siam in Asia, to carry maritime

commerce into the interior parts of that great continent: and the great rivers of Africa are at too

great a distance from one another to give occasion to any considerable inland navigation.”

Smith, Adam, 1776, An Inquiry into the Nature and Causes of the Wealth of Nations.

Resources could finance the infrastructure intra-continental trade

& development!

Spatial (infrastructure) Linkages

Africa has extremely high logistics costs due to NTBs and bad transport

infrastructure!

PJ

e.g: Sn African SDIs under development or consideration

Use high rent resources to catalyse sustainable high-impact sectors, esp.

agriculture & agro-processingPJ

ProcessingIntermediates(feedstocks)

ResourcesExploitation

Exploitation capital goods: e.g. plant, equipment,

after-market, etc.

.

Exploitation services:

e.g. financial, technical, consumables, logistics,

energy, skills, etc.

Processing capital goods

Processing services

Intermediatescapital goods

Intermediatesservices

Infrastructure: transport, energy, skills, R&D

Catalyse other Sectors & Areas (agri, tourism, etc.)

Feedstocks &

Tech. (bene.)

Ma

nu

factu

ring (e

.g. ca

p g

ood

s)

Resource Linkages: key to growth & development

BEYOND COMMODITIES?Use Asian resource demand to kick-start a

Resource-based African Industrialisation Strategy“RAIS”

Recap:

OM

Resource Exploitation & infrastructure phase

Resource Consumables & HRD phase

Resource R&D, capital goods & services phase

Lateral migration & diversification phase

Resource Exploitation

Resource Beneficiation (value-addition)

Resource Infrastructure

Densification Infrastructure

Unskilled resource labour

Rents from Resource diversification industries Diverse tax base

Resource rents (tax)

From AMV: Schematic RAIS Phasing (relative economic importance)

Resource Inputs production & Lateral migration (diversification)

Skill intensity (HRD)

Import of Resource Inputs

Phase 1 Phase 2 Phase 3 Phase 4

Resource R&D. high level skills and tech development

Import of Resource Technologies

Complex regulation, M&E, arbitration, governanceLocal judicial system

Contract/license resource & infra (PPP) governance

I

II

III

IV

V

VI

VII

OM

Most African states in Ph I-2

Conclusions• The Asian boom and concomitant strong demand for

Africa’s natural resources could provide a window of opportunity for a resource-based African industrialisation strategy (RAIS)

• Such a RAIS must optimise the developmental impact of resources by ensuring that the resource economic linkages are made (fiscal, spatial, knowledge, backward and forward)

• African resource regimes (particularly mineral regimes) need to be overhauled to allow for the competitive concessioning of the region’s resource endowments (land, minerals, water, fisheries, state rights, etc.), to maximise price discovery and developmental objectives (linkages)

• VA economies-of-scale and competition would be greatly enhanced by a common Africa markets (customs unions) which could start with regional steel & energy groupings. PJ

Way ForwardAlign with the AU minerals strategy:

1. Develop an “AFRICA INDUSTRIALISATION VISION”2. Unpack the VISION into a coherent African value addition

Industrialisation Strategy (in sync with the AU minerals & other strategies), using regional validation workshops;

3. Concretise the AU Industrialisation Strategy with templates, toolkits, model resources concession agreements, model legislation/regulation, sub-sector strategies and other useable tools/aids

4. Establish ongoing continental & regional peer learning fora to develop African “best practice” strategies for VA

5. Establish regional African Steel and Energy economic groupings (RECs)

6. Impose a Resource Rent Tax, on all excess profits above the expected return, on all resource exploitation concessions. Should be kept offshore (<DD) to capitalise regional development funds to finance long-term regional physical and knowledge (HRD & R&D) infrastructure for more equitable regional economic integration (<IP, bambazonke) PJ

Thank YouMerci

ShukranObrigado

paulj1952@gmail.com