As the world transitions to a ‘green’ industrial revolution, countries with reserves of the critical minerals that power clean growth should be in a position of strength. But history says otherwise. In our final blog of our critical minerals series, we look at historical problems associated with FDI in extractive industries and suggest how Investment Promotion Agencies can help generate the most value from their assets.
FDI and the natural resources curse
Many mineral-rich countries have ended up victims of what has been termed the ‘natural resources curse’. They underperform economically despite having access to abundant resources. There are many reasons put forward for this, ranging from poor governance to multinational corporations using transfer pricing to artificially manipulate tax and profit-sharing agreements, but the fact remains that what should be a benefit often ends up a curse.
This is also true for FDI where research has shown that natural resources can have a detrimental effect on foreign investment. In this case, when a country has attracted resource-seeking FDI it often did so at the expense of investment in other parts of the economy. The result is that reduced investment in the broader economy can have significant impact on the financing and innovation that is essential for growth.
Time to move up the value chain
While research on extractive industries and FDI has typically focused on resources such as oil, gas, and coal (with data from the early part of the century), there is little evidence to suggest that the transition to critical minerals will change the dynamic. To stop history repeating itself, mineral-rich countries and the agencies that promote investment in these countries must use this moment of high demand to stake a claim for a bigger slice of the economy they underpin.
If you are a country rich in high demand minerals your strategy should be to move up the value chain. For example, increasing domestic processing capacity so you can export intermediate or finished goods. The prize would be better jobs, higher tax revenues, and increased export values.
There is evidence that this is happening. One example provided by our partner SMM, a leading metals information provider, involves a subsidiary of American Resources Corporation who partnered with companies in Ghana to build Africa’s first lithium processing plant in Ghana. As part of the deal, the plant will include a training facility for lithium processing, emphasising new arrangements where skills and knowledge transfer are incorporated to empower local talent.
However, such examples are the exception rather than the rule, and given the size of demand there is more that needs to be done by governments to attract the investment that will produce the best return for domestic economies.
How investment agencies can secure the best deal
Investment Promotion Agencies play a key role in attracting extractive industries and the value they provide is often through balancing the needs of economic development with the needs of global companies who must answer to shareholders.
In any negotiation, it is important to understand what the other party wants. In this case, agencies are dealing with companies who expect to make a profit from what is typically a huge upfront investment, and they are looking for long-term stability, regulatory simplicity, access to data, ease of operations, and skilled workers.
For mineral-rich countries it is essential to create value propositions that highlight investment in skills, infrastructure, and downstream industries, alongside examples of regulatory support and good governance. To further seal the deal, propositions supported by improved geological mapping, or the offer of such, can also help differentiate the offer by demonstrating the commercial viability of potential sites.
While investment attraction is a competitive process, governments should also learn from the past and think beyond their borders. Wider regional cooperation that stops mining companies from playing one off against the other will help set the boundaries for investment encourage value rather than a race to the bottom.
Seize the moment
Mineral resources can become a source of economic growth, but only if governments have a strategy to get the greatest benefit from their assets. Identifying how to move up the value chain and the associated investments in skills, infrastructure, and information will make countries more attractive to international investors while also benefitting the local economy.
OCO Global has experience in strategy development and creating compelling value propositions that connect governments and businesses for mutual benefit. To find out more about our services, get in touch HERE.
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