Resource-based African industrialisation “New Thinking on Industrial Policy: Implications for Africa ” Pretoria July 3-4

1. Resource-based African industrialisation “New Thinking on Industrial Policy: Implications for Africa” Pretoria July 3-4, 2012

2. Africa’s Natural Resources • Agriculture • Contributes 40% of African GDP % provides livelihood for 60% of population, but largest user of scarce water • Enormous unrealised potential (low yields & only x% under cultivation) • But, agri-commodities exported without processing (beneficiation) • Minerals • World’s top producer of numerous mineral commodities; • Has world’s greatest resources of many more; • Africa lacks systematic geo-survey: could be > resources; • But exported as ores, concs, metals: Need > beneficiation. • Energy • Significant fossil fuels (oil, gas and coal) • Large biomass and bio-fuels potential (ethanol, bio-diesel) • Massive hydro-electric potential (Inga 45GW, Congo River 200GW) • Forestry • 22% of African land is forested (650m hectares= 17% of world total); • Deforestation: Africa’s net change highest globally = -0.78% p.a; • Huge silviculture potential, but exported as logs/chips: need > bene. • Fishing • Decline in catch rate (international poaching! over-harvesting); • 68% of marine protected areas under threat; • Aquaculture/mariculture still nascent (large potential) • Tourism • Major potential (world’s greatest diversity: culture, flora, fauna, geomorphology) • Increasingly important source of livelihood

3. Asian Boom:New “scramble for resources”? High intensity, Africa’s new opportunity? High intensity, sellers market: Colonial System Low intensity, buyers market: stagnation & instability Steel- Good proxy for all metals ex-precious

4. How long will the boom last? High Intensity FlatIntensity ? Steel Intensity (all metals proxy) PRC China + India > 2X pop’n of First World! India ~$16k/capita Data Source: BHPB 2006 However, prices will fall as Asian intensity of mineral consumption falls (China ~2025?, India ~2040?)

5. Asian demand has provoked a dramatic increase in mineral prices (from 2002/3). Less so for agro raw materials & foodstuffs • Price lag due to: • Market distortions (OECD agri-subsidies) • High mineral supply inelasticity (=windfall rents) • Substitution (shift from crude oil to oilseed-based biofuels)

6. Asian boom has also provoked a dramatic increase in FDI (resources & telecoms) Source UNCTAD 2011 Minority World FDI now greater than OECD

7. Africa’s Natural Resources

8. Africa is well-endowed with mineral resources Mineral Production& Known Resources (‘04)(however, much of Africa is still un-surveyed)

9. Africa also has significant energy resources: fossil fuels (oil, gas, coal), HEP & geothermal Goethermal Potential: Great African Rift Valley Gulf of Guinea considered to be one of the world’s most prospective oil & gas terrains And Africa has huge HEP (Congo R: 200GW)

10. Inappropriate Mineral RegimesAfrica is not capturing mineral rents! High Prices: “Free Mining”regimes- rents exit Need to urgently update! High prices: colonial mineral regimes: Pro- colonisers/TNCs Low prices: WB revisions: Overly pro-TNC! High prices: Post-colonial regimes: Strongly national

11. Optimised Future Mineral Rights Admin?Hybrid free mining (FIFA) and tender system Define 3 Types of Mineral Terrains: 2.Partially Known 1.Unknown Mineral assets 3.Known Mineral assets Delineation Terrain (Auction) Exploration Terrain (FIFA) Geo-Reserve Terrain Public Tender on: • Further geo-survey: GSD SMC, or sub-contractors Exploration License (Mining Licence Automaticity) • Tech & Fin Capability • Rent share (tax) • Up/downstream investment • Infra development • HRD & R&D, tech transfer • Community development Progressive Resource Tax (e.g. RRT) • Risk exploration for future step-in rights. “Mining Charter” type socio/labour conditions Mining Concession/Licence

12. Africa also has abundant known fertiliser minerals (NPK)! Agri-mineral deposits (ex- gas/coal & K) Nitrogen sources (oil/gas & coal) & K resources But, generally undeveloped for the African market, mainly due to severe logistics constraints.

13. Regional Fertiliser Use (kg/ha) But the lowest fertiliser use in the world! Africa <10% Global Average! Partly due to very high logistics costs

14. Africa has significantAgricultural potential Mainly between the tropics

15. Land utilisation in Africa (percentage of total land area) Less than 50% in the well-watered tropics! Source: UNEP- compiled from FAOSTAT 2001

16. Africa- Arable land & usage by region FAO estimates 300 million Ha of arable land

17. e.g. agro-potential: possible repeat of Brazil's soya success? Brazil Soy Boom replicable? (similar soils & climate)

18. And water potential…(except for North Africa) Less than 4% of its water potential is used!

19. Although water resources are large, by 2025 availability/cap. will be under stress in most African states, without huge investments in water infra-structure!

20. Africa also has important forestry production, and large forestry & biofuels potential.But much of its logging is unsustainable… Notes: Product production and consumption have been converted to their roundwood equivalents (m3 EQ) to be compatible with roundwood production and potential figures. Growth rates shown are growth over the period 1996 - 2010. (source: FAO)

21. Africa also has large biofuels production potential.

22. Using natural resource endowments to underpin industrialisation?

23. Using resources to industrialiseSuccessful states managed to maximise the resource linkages 5. FORWARD Value-addition: (beneficiation) Export of resource-based articles 1. FISCAL: Capture & invest of resource rents (RRT) in long-term economic physical & human infra (inter-generational) Use depleting assets to underpin growth in sustainable sectors 4. KNOWLEDGE Linkages (HRD & R&D): “Nursery” for new tech clusters, adaptable to other sectors 2. SPATIAL Puts in critical infra-structure to realise other economic potential & could stimulate LED 3. BACKWARD Inputs: Capital goods, consumables, services, (also export) HRD, R&D 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!

24. Resource Linkages: Spatial Linkages: Infrastructure (transport, power, ICT) and LED Forward Linkages: Intermediate products => Manufacturing; Logistics ; other sectors (agriculture , forestry, fisheries, etc.) Backward Linkages Inputs: Capital goods Consumables Services Resource Extraction Mining: Concentration, smelting, refining => metal/alloy Fiscal linkages: Resource rent capture & deployment: long-term human & physical infrastructure development Knowledge Linkages HRD: skills formation R&D: tech development Geo-knowledge (survey)

25. Resources provide opportunities for up-, down- & side-stream linkages • mining capital goods • drilling • cutting • hauling • hoisting, etc. • Int. Products Cap.goods • Rolling • Moulding • Machining • assembling • processing cap. goods • crushers/mills • hydromet plant • materials handling • furnaces, etc. Mining Smelting & Refining Intermediate Products Mineral Processing Exploration • 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 • Refining Cap. Goods • Smelters • Furnaces • Electro winning cells • Casters • expl. capital goods • geophysical • drilling • survey • etc. Resources inputs sector (up-stream) has a comparative advantage in: Relatively large local market Development of techs for local conditions National asset: permits for concessioning with strong linkages conditionality

26. Using a natural comparative advantage to develop a competitive advantage Finland: The mature forestry industrial cluster 1997a NATURAL COMPARATIVE ADVANTAGE Abundant forestry reserves and plantations (400-600m3 per capita)b • FORWARD LINKAGES • Roundwood • Sawnwood • Plywood (40% of the world market) • Wood products • Furniture • For construction • Wood pulp • Paper and cardboard • Newsprint • Art paper (25% of the world market) • Toilet paper • Packaging • Special products • BACKWARD LINKAGES • Specialized inputs • Chemical and biological inputs (for production of fibres, fillers, bleaches) • Machinery and equipment • For harvesting (cutting, stripping, haulage) • For processing (for production of chips, sawmills, pulverization) • For paper manufacture (30% of the world market) • Specialized services • Consultancy services on forest management • Research institutes on biogenetics, chemistry and silviculture SIDE LINKAGES Related activities Electricity generation Process automation Marketing Logistics Environment industries (paper) Mining (sulphuric acid) a: Generates 25% of Finland’s exports; b: Compared with 25-30m3 per capita in the rest of the world. (SA has a similar comparative advantage in minerals) Source: Ramos 1998 p111 (CEPAL Review, #68, 12/1998);

27. Linkages: The foreign capital “trade-off” In order to rapidly acquire the requisite capital and skills, African states have generally opted to realise their resource endowments through attracting foreign resource companies (TNCs & JRCs), rather than mainly relying on domestic capital. However, this “trade-off” comes with several possible “threats” • TNCs often have global purchasing strategies which are less likely to develop local suppliers (linkages), • TNCs tend to optimise their global processing (beneficiation) facilities which can deny local downstream opportunities; • TNCs locate their tech development (R&D) in OECD countries,, thereby denying Africa the development of this critical side-stream capacity; • TNCs also tend to locate their high level HRD in OECD countries (often linked to their R&D university partners), which could deny African states the development of this seminal capacity; • In the longer term there are clearly political downsidesto a resource sector dominated by foreign capital; • Finally there is the TNC “core competence” conundrum. However, all of these threats can be overcome or ameliorated through appropriate actions, policies and interventions!

28. But this huge resources potential is critically constrained by poor infrastructure • Africa is the highest continent (few navigable rivers), > infra cost and O&M cost; • 93% of Africa in the tropics (ITCZ, high ppt): >cost of infrastructure provision and O&M; • Incoherent European balkanisation resulted in many African states being landlocked; (7X >OECD) • Africa has only 10% of land within 100km of coast (cf. 18% OECD & 27% Latin America) and • Only 21% of its people live within 100km of coast (cf. 89% OECD & 42% Latin America); Resulting in Africa having the world’s highest relative logistics costs (bad infrastructure) Africa’s potential could be realised through integrated Development Corridors-

29. Proving Adam Smith Wrong 250y 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. 1976 [1776]. An Inquiry into the Nature and Causes of the Wealth of Nations. Chicago: University of Chicago Press (Cannan’s edition of the Wealth of Nations was originally published in 1904 by Methuen & Co. Ltd. First Edition in 1776). page 21 High-rent minerals could finance infrastructure to open up the continent!

30. Sharing of Best in Practices in Southern Africa SDIs/Dev.Corridors (RSDIP) Based on UNREALISED economic potential

31. Underlying DC Drivers Due to the global market distortions of First World agri-subsidies (Doha), mineral-based opportunities are generally the only ones with requisite rents to pay for the provision of costly infrastructure (transport & energy). For this reason the indicative DCs (SDP) “anchor” projects tend to be minerals or energybased which establish infrastructure to underpin the viability of projects in other, sustainable, sectors: “densification”). However, the DC methodology goes beyond the “colonial” paradigm (resources to coast) to integrated growth & development using resources to catalyze the process

32. Simplified SDI Methodology Anchor mega-projects or clusters Underpin the financing of..... Trunk infrastructure (rail/road, power, gas, water, ports) which opens up the.... Development of economic potential in other high impact sectors (e.g. agriculture & agri-processing (collateral impacts) “densification” of the corridor through feeder infrastructure to service the high developmental impact collateral investment potential Identification of related upstream infrastructure investment opportunities (project “deepening”) Identification of related up- & downstream investment opportunities (project “deepening”) Problem: Multi-state coordination!

33. Idealised DC Configuration Agri-node & “cluster” Anchor & “cluster” Stranded investment feeder “TRUNK” Infrastructure: PPP DC logistics “catchment” Problem feeder Problem feeder “DENSIFICATION” Feeders often need to be funded thru’ fiscus/grant Stranded investment Anchor & “cluster”

34. Maghreb Coastal Current SDIs RSDIP NEPAD indicative Spatial Development Program First Pass! Niger: Dakar – Port Harcourt Red Sea - Nile Djibouti Conakry Buchanan Sekondi Ougadougou Douala Mombasa Gulf of Guinea Coastal Libreville Lomie Madagascar Bas Congo NEPAD SDP: 1st Pass

35. The “Resources Curse”Improving Governance – Multi-lateral Instrument s • African Peer Review Mechanism (APRM) • EITI- Extractive Industries Transparency Initiative • Equator Banks Principles • Governance of “Conflict Minerals” (diamonds, Au, Nb, Ta, Sn) • SHE & CSI standards/monitoring • Windfall Rent Management (SWFs Santiago Principles) • Regional authorities: power pools; river catchment bodies, DCs, customs/currency unions, etc. • New contract negotiation support mechanism/s (under formulation)

36. Catalyse other Sectors & areas (agriculture, etc.) Infrastructure: transport, energy, skills (SDP) Manufacturing (e.g. cap goods) Processing Intermediates (feedstocks) Resources Exploitation Feedstocks & Tech. (bene.) Recap: Inputs: Invest in tech HRD and R&D • . Exploitation capital goods: Processing capital goods Intermediates capital goods BEYOND COMMODITIES? Use Asian resource demand to kick-start a Resource-based Industrialisation Strategy Exploitation Services: Intermediates services Processing services Inputs: Invest in tech HRD and R&D Human capital key to inputs clusters (e.g. Nordics)

37. Resource Beneficiation (value-addition) Resource Exploitation Densification Infrastructure Resource Infrastructure Skill intensity (HRD) Unskilled resource labour Rents from resource diversification industries Diverse tax base Fiscal: Resource rents (tax) Resource Inputs production & Lateral migration (diversification) Import of Resource Inputs Schematic Resource-based Indust. Phasing (relative economic importance) Resource R&D. high level skills and tech development Phase 1 Phase 2 Phase 3 Phase 4 Import of Resource Tecnologies I II III IV V VI VII Complex regulation, M&E, arbitration, governance Local judicial system Contract/license resource & infra (PPP) governance Resource Exploitation & infrastructure phase Resource Consumables & HRD phase Resource R&D, capital goods & services phase Lateral migration & diversification phase Tanzania Zambia Zim (pre-crisis) Brazil SA Russia Oz Nordics

38. Way Forward? • Open up resources potential using regional development corridors- stimulate intra-regional trade; • Capture resource rents through an effective Resource Rent Tax (build revenue service capacity); • Hold RRT in offshore SWF and deploy in upgrading human capital, technology capacity & infrastructure; • Amend free mining laws for allocation of mineral rights by public tender: against rent take and industrial linkages (“price” discovery); • Make all resources and infrastructure concessions conditional on local content and VA milestones; • Encourage FDI in resources backward and forward linkages industries; • Build /expand multi-lateral governance instruments.

39. Thank You