Leveraging on the extractive sector to expand the local economy

Leveraging on the extractive sector to expand the local economy

By Kudakwashe Dzwiti

Mention the name Zimbabwe Iron and Steel Company (ZISCO) in any corner of Zimbabwe, everyone will shake their head in disgruntlement. Everyone wishes the giant iron and steel industry was still functional or at least be resuscitated to its former glory days. What could be the secret behind ZISCO that everyone wishes blast furnaces should be running in the now ghost town of Redcliff? It all goes back to the economic benefits that were coming from this giant iron and steel plant. Even the economy of Zimbabwe caught a cold when ZISCO sneezed as it was once the biggest earner of foreign currency in the country. The company at its peak was producing approximately 1 million liquid steel per annum and employing around 6000 workers. ZISCO provided markets for upstream companies like oxygen from Sable Chemicals, coal from Hwange Colliery, electricity from Zimbabwe Electricity Supply Authority (ZESA) and the National Railways of Zimbabwe (NRZ) for transportation of raw materials and products. Downstream through Zisco Agricultural Implements Manufacturing (ZAIM), the steel giant in Redcliff was responsible for sustaining the agriculture industry. It provided agricultural implements such as irrigation equipment, disc harrows, sheds, scorch carts, and ploughs. It sustained the transport sector through railway lines, brake discs, transmission lines, vehicle chassis bodies, conveyor belt structures, wheel drums, trailers, and tankers.

Companies like ZIMALLOYS, ZIMCAST, ZIMCHEM, and Lancashire Steel all depended on prime raw materials from ZISCO. Close to six bank representatives were operational in Redcliff including CABS, CBZ, POSB, and Barclays Bank. All these linkages collapsed together with ZISCO when the company shut down in 2008 leaving behind a big trail of unemployment, and loss of businesses. This is one of the reasons why Zimbabweans hope and wish for the company to be resuscitated. The steel plant was linked upwards, downwards, and sidewards providing an economic footprint to the whole nation. Will that ever happen again, no one knows, will the new Chinese iron and steel plant in Manhize fill the vacuum, only time will tell.

This background highlights the importance of how resource-rich countries like Zimbabwe need to create diversified economies that leverages on the abundance of mineral resources. This is the main goal of the African Union’s Agenda, the African Mining Vision, and the Plan of Action for Accelerated Industrial Development of Africa. It is also subsumed under Goal 9 of the adopted Sustainable Development Goals (SDGs) which seeks to “Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation”. Zimbabwe is endowed with over 40 minerals, but it continues to punch below her weight because of its continued failure to create a vibrant mining industry that has a legion of upstream (or backward) linkages, downstream (or forward) linkages, horizontal (or lateral) linkages, consumption linkages, knowledge and technology linkages, and spatial linkages.

This article will unbundle how Zimbabwe can leverage its extractive sector to develop linkages that will catapult the industry from the current US$7 Billion industry to more than the targeted US$12 Billion industry. The extractive sector presents one of the few comparative advantages, which will inevitably continue to play an important role in economic development strategies. Much focus has been placed on how Zimbabwe can attract foreign direct investment in the extractive sector to increase domestic revenue collection. Less emphasis has been placed on how foreign

extractive industry investments can be linked to the domestic economy to increase the skill level in the country and diversify the economy in the long term. There are different linkages that Zimbabwe can leverage. These are upstream linkages, which are related to the procurement of goods and services that mining projects need to operate; downstream linkages, which result from further processing of the extracted commodity; horizontal linkages, which relate to the development of new industries using the capabilities of the mining-related supply chain; consumption linkages, which result from increased spending of earnings originating from the mining sector; knowledge and technology linkages, which relate to the transfer of knowledge and technical know-how within the mining value chain; and spatial linkages, which are the benefits from shared use of infrastructure investments that the mining sector requires to operate.

For the sake of doing justice to these subjects, only two types of linkages will be discussed in this coverage, the rest will be covered in other upcoming articles. Upstream or backward linkages make up the bulk of the money spent by extractive industry companies. BP and Anglo-American in 2014 estimated that they respectively spent 87% and 64% of total value created on suppliers as compared to 2% and 11% on government payments. These figures highlight why governments are increasingly relying on local content regulations that require extractive industry companies to purchase goods and services domestically. Apart from increasing the number of companies producing goods and services for the extractive industry sector, which in turn creates additional indirect employment opportunities, upstream linkages also have the potential to improve the expertise and quality of goods and services of suppliers, given that extractive industry companies require high international standards that must be met.

Different types of upstream linkage opportunities exist at the different stages of the project life cycle, with the greatest scope for upstream linkages during the production stage. The mining- related opportunities that could be realistically seized in the short-to-medium term are services (legal and regulatory, mining and drilling, transport and logistics, supply of lubricants, analysis and testing, civil works, supply of metal fabrication, mining village management), capital equipment, consumables (explosives, roof bolts, ventilation columns, etc) and non-core goods and services. However, an evaluation needs to be done on whether the local economy has seized such local procurement opportunities. In Zambia, while most of the goods were provided by local entrepreneurs, most of the goods were not manufactured in Zambia but imported from abroad through Zambian companies. Therefore, while the mining companies would present substantive local expenses in terms of local procurement, only a small proportion is attributed to goods that were produced locally.

This should not be the case for Zimbabwe if the scope of upstream linkages is to be expanded. Products need to be produced locally and with globalization consider exporting some of the services. The government should devise a local content policy that is realistic, increases in ambition over time, seeks to increase value-added rather than local ownership requirements, and monitors or enforces the achievements through dedicated institutions. Structural gaps that prevent local suppliers from expanding their capacity, including such factors as poor infrastructure, lack of access to finance and limited technological support, need to be addressed. Then downstream or forward linkages refer to the processing, beneficiation, and value addition of the extracted

commodities. Maybe to give a brief description of the mining value chain, it starts with the extraction of ore from an open pit or underground mine. The ore is crushed, ground, and beneficiated through separation, concentration, and filtration. These methods increase the mineral content to the point where they can be smelted and transformed into ingots, cathodes, or other forms that feed into the semi-fabrication sector. There may be additional steps and stages within the semi-fabrication and fabrication process before the extracted resource reached the end user in the form of a product.

Zimbabwe, among some resource-rich countries has placed much emphasis on moving into downstream segments of the value chain to capture more value-added, create additional employment opportunities, and diversify the economy, all of which are associated with substantial spillover effects. Several policies have been enacted in trying to incentivize or push value addition through an increase in export taxes on unprocessed concentrates and to some extremes completely banning the exportation of unprocessed mineral concentrates. These policies have not given much- expected traction for the downstream linkages and repeatedly some of these policies were reversed as they were causing unintended consequences. Government should use policy instruments that promote moving into downstream activities. This can be justified if there is a possibility to create a competitive advantage in the long run by protecting the industry in the short run, which is known as the infant industry argument.

Downstream linkage is one of the few opportunities that Zimbabwe has to diversify its economy and become less dependent on raw commodity exports. However, such policies come at a cost and require the government to support the implementation of these decisions. One country that has successfully leveraged its extractive sector to move downstream is Botswana. Botswana used its strong negotiation position in 2005 when De Beers wanted to renew its mining license for Debswana, the government insisted on the company’s help regarding developing a domestic cutting and polishing industry. Consequently, a set number of rough diamonds were allocated to the domestic cutting and polishing industry, wherein companies were required to hire locals and provide training to guarantee the allocation of diamonds. The target allocation would increase over time, with the agreement including fines for non-compliance with the targets. Moreover, the government did not fold its hands but supported the industry through fiscal incentives and infrastructure investments. De Beers later agreed to move its aggregation business, selecting, and mixing the diamonds from De Beers mines for its customers from London to Gaborone, in the hope of creating considerable spillovers to other industries such as hospitality, finance, and transportation since diamond buyers would now have to go through Gaborone to buy De Beers’ diamonds.

This is a typical example of how Zimbabwe can learn from a fellow African country on how to leverage its extractive sector to expand the local economy. However, downstream activities tend to require specialized skills, good infrastructure, and are energy intensive and these inherent costs should not be underestimated. Currently, Zimbabwe is battling power cuts which are affecting mining operations. This is a sign that as a nation we are not yet prepared to support energy- intensive downstream industries. The government should invest more in energy or consider enacting policies that allow independent power generation so that there is an abundance of power
to support industry expansion. The time has come for Zimbabwe to look beyond extraction and exportation of raw materials but to leverage the extractive sector to create a vibrant economy in Southern Africa, AfCFTA is right at our doorstep, all we need is to up our game.


Leave a Reply

Your email address will not be published.