Local Content

Tanzania is rich with natural resources, which have significant potential to contribute to the country’s economic development. Several laws recently passed in Tanzania are dedicated to establishing linkages between foreign firms in natural resource extraction and the local economy. This chapter documents this legislation and the institutions set up to enforce and monitor these laws. Effectiveness of local content legislation and the potential for firms in the mining sector to contribute to local development are then evaluated using a combination of qualitative and quantitative evidence. The chapter next uses existing data to explore trends in local content and the estimate the value of local content in the mining sector; this exercise highlights the need for improved data. We then examine other developing countries’ experiences with local content legislation, drawing lessons for Tanzania.

Gas in Tanzania

There are large volumes of gas offshore Tanzania, which has raised hopes of a boom and accelerated economic development. With such big numbers associated with the natural gas, it is not hard to imagine the fantastic prospects of increased wealth and accelerated development. But those hopes look set to be disappointed. A boom would depend heavily on there being a sizeable flow of revenue to government from producing and exporting gas. This chapter sets out the scale of the gas, and the array of risks which currently make investment in gas production, and any associated boom, unlikely. As well as geological, engineering, and market risks, the risks to investment from public policy have been elevated over the last few years.

Rowing against the Current

It is likely that Africa holds almost a third of the world’s reserves of minerals, oil, and gas. The exploitation of natural resources is a huge opportunity, but it also carries considerable risks. The exploitation of natural resources is a huge opportunity, but one that carries considerable risks. Relative prices in resource-exporting economies tend to push them towards economic structures dominated by the resource sector. This chapter explores ways to achieve diversification in a resource-rich economy. It describes the relative price changes that accompany a resource boom and suggests policies and public investments to mitigate their impact. It explores some of the issues that influence the participation of local firms in the resource value chain and argues for broadening the options for diversification, through the development of ‘industries without smokestacks’ and investments in knowledge.

Overview

For a growing number of African economies the discovery of natural resources is a tremendous opportunity, but one accompanied by considerable risks. Many African countries dependent on oil, gas, and mining have weaker long-run growth, higher rates of poverty and greater income inequality than their less resource-dependent neighbours. One major risk comes from the structure of resource-rich economies themselves. Relative prices make it more difficult to diversify into internationally competitive activities outside the resource sector, thus narrowing the scope for structural change. This chapter focuses on how countries can use natural resources to diversify. Drawing on country-level evidence it explores three key themes: the institutions needed to manage a resource boom, the construction sector, and linking industry to the resource.

Local Content in Zambia—a Faltering Experience?

At independence in 1964, Zambia inherited an economy driven by copper mining. This has not changed despite post-independence policies to industrialize and diversify the economy. This chapter traces the role of local content in Zambia’s mining sector in supporting industrialization and economic diversification. It assesses productive linkages and manufacturing competitiveness during the import-substitution industrialization and post-1991 liberalization and privatization periods, and the adequacy of the current policy environment. Despite diminished productivity and export competitiveness during import-substitution industrialization, that era was successful in terms of domestic manufacture of mining goods. Privatization and liberalization stymied local content capabilities, retarding industrialization and economic diversification. Post-2000 policies emphasize local content development and export competitiveness. Their success, however, depends on addressing continuing weaknesses in the regulatory environment; human and technological capital; endogenous entrepreneurship; and the macroeconomic environment.

The Boom–Bust Cycle of Global Copper Prices, Structural Change, and Industrial Development in Zambia

This chapter is about understanding the cycle of global copper price booms and busts over Zambia’s economic history. We explore how the mining industry has been managed, and wider economic management during boom periods. We find that successive Zambian governments did not use copper revenues to accumulate productive assets, focusing instead on financing consumption subsidies and sustaining inefficient state-owned companies. In recent times, Zambia has accumulated worryingly high levels of sovereign debt with virtually no prospect of official debt relief. Nonetheless, a reasonable chance exists of avoiding debt distress, provided the authorities consistently pursue strong fiscal management and discipline. Ultimately, Zambia’s ability to ring-fence and prudently use the mineral revenues from copper mining in building productive capacities remains elusive. Instead recurrent consumption expenditure demands dominate the fiscal landscape and the agenda of the fiscal authorities.

Construction and Public Procurement in Uganda

As it transitions to an oil-producing country, Uganda’s investments in infrastructure and physical capital will increasingly depend on the ability of the construction sector to respond to surges in demand and transform investment effort into outcomes. Using administrative and survey data, this chapter sets out to examine the current bottlenecks to production faced by the construction sector in Uganda and identifies possible policy remedies to relieve them. A secondary point of emphasis in the chapter’s analysis is the interaction between government and construction firms through public procurement, and the instrumental role procurement plays in the efficient development of the industry. These new opportunities and challenges raise several questions. How much of the increased economic activity will be passed to the domestic private sector? Will these opportunities motivate efficiency and transparency? Would corruption and inefficiency in public procurement still play a major role as a barrier to industry development?

The Boom, the Bust, and the Dynamics of Oil Resource Management in Ghana

Oil resources are neither a curse nor a blessing. In order to translate Ghana’s oil resources into inclusive development amid high expectations, several laws and regulations have been passed and new institutions created. Despite the presence of the new institutions, laws, and regulations, spending from petroleum revenues appears to be rather thinly spread and inefficient, defeating the purpose of diversification and leading to high debt and cost over-runs. On a positive note, the government and Bank of Ghana have been complying with most of the transparency requirements. It is essential that spending from petroleum revenues is guided by a medium- to long-term inclusive development strategy based on proper needs assessment, global trends, feasibility studies, and possible growth dynamics. Expenditure needs to be rationalized and investment guidelines developed and implemented.

The Construction Sector in Zambia

The construction sector plays a critical role in delivering quality infrastructure, which in turn influences the use of natural resource revenues towards achieving structural change and development. We use industrial organization and political economy lenses to describe and understand the organization of and changes in the construction industry in Zambia, focusing on demand-side factors; supply-side issues; market interactions through prices and costs; and public institutions, regulations, policies, and structures. We establish the main firm-level, industry-wide, and macroeconomic bottlenecks affecting Zambia’s construction sector, and offer options for dealing with the key bottlenecks. We suggest institutional reforms and legal and regulatory changes governing procurement and contracting rules and systems; training and other capacity-building programmes; greater access for local contractors to existing financing sources, including the Skill Development Levy; a review and update of the local content and subcontracting strategy and policy; and state-supported and financed research and development programmes.

Uganda’s Oil

This chapter studies Uganda’s journey to become a petroleum producer and provide estimates regarding the size and timing of the oil revenues. At an average US$38 per capita per year over a thirty-three-year period, oil revenue by itself will not be transformational for the Ugandan economy but it could provide a welcome boost. The question is whether the Ugandan government will manage to avoid squandering it, and will transform the country’s natural resource assets into productive assets. To this end, the government has made significant changes and additions to the policy and institutional framework that will govern the use of revenues, adapted from the Norwegian model. We study the framework put in place and identify a number of potential shortcomings. Weaknesses in public investment management further raise doubts about the transformational impact of the planned investments.