How industrial policies can complement future sustainable resource extraction in Africa

Low-income, resource-abundant developing countries can become key actors in the global supply chain for critical minerals. Global electrification and the adoption of low-emissions technology in the energy sector are boosting demand for critical minerals such as lithium, copper, nickel, cobalt, and other rare earth minerals. Future climate and technology scenarios modelled by the International Energy Agency (IEA) predict demand growth for minerals driven by large-scale adoption of solar and wind technologies, batteries and energy storage systems. In a rapidly advancing technology space, the exponential climb in demand for critical minerals may catalyse economic growth in resource-rich countries in Africa.

Table 1: Critical minerals in emerging technologies

Notes: Certain minerals have lower demand risk due to their broad application across technologies. Table from IEA model via World Bank (2022).

Investors are looking urgently for profitable and secure supplies of critical minerals

In December 2022, a US-based innovative mining company struck a US$150 million deal with Zambia to mine copper. Indonesia has identified nickel as a transformative resource for their economy, increasing mining by 30% since 2017. Firms who have committed to developing green technologies and meet their internal environmental and social goals are eager for new sources of responsibly extracted minerals. Both a competitive investment environment and policy regime are needed so resource-rich countries may generate sustainable income from these industrial developments.

Reserve estimates indicate countries in Africa are abundant in many critical transition minerals, including copper, aluminium, cobalt, chromium, and manganese. These minerals have demand across at least four different low-emissions or renewable technologies. Looking at copper, Zambia and the Democratic Republic of Congo (DRC) countries make up about 4% of the global reserves and constitute about 12% of annual global production.

Figures 2a, b: Low- and middle-income country copper and nickel production

Note: Annual production of copper based on estimated and reported annual extraction. Numbers above bar charts indicate global annual production levels (in Mt) but do not correspond to the axis. Source: World Mining Data (2021).

Africa, a key region for mineral production, has yet to meet the growing global demand. African countries still lack linkages with global supply chains in critical metals, such as lithium, despite concentrated reserves. Around 1.8% of global lithium production is currently in Zimbabwe and other African countries, while it is estimated the continent holds at least 5% of global reserves. Meanwhile, lithium production in Chile is set to undergo full nationalisation as a strategy to retain profits domestically. This, however has pushed many mining firms from Chile to other countries with resource deposits. Resource-rich African countries need to urgently create the physical and credit infrastructure for the mining sector to develop, as demand for minerals rapidly increases, and seize this new opportunity.

The ghost of the resource curse must not spook resource-rich countries

In previous decades, many resource-rich countries, particularly in Africa, saw economic decline associated with a resource boom. These developing  countries fell victim to the ‘resource curse’, or the failure to harness gains domestically from the extraction of natural resources. Failure of previous natural resource regimes occurred where:

• the mining sector was overexploited, and tax revenues were not well captured
• diversification in exports stagnated with the success of the resource and incomes plateaued, or
• state investment was concentrated exclusively in mining extraction and without regard to upstream or downstream investments

Currently, high-income economies benefit from liberal trade policies, advanced mining technologies and the infrastructure to support the mining industry. Resource-rich developing countries need to create a set of policies to capture the future benefits from their resource revenues and avoid previous failure of natural resource-rich regimes.

Industrial policy can target the weaknesses in the mining sector

To seize both the immediate and long-run benefits in the global shift to electrification, local mining projects need to be designed to capture both tax and non-tax benefits. This is where industrial policy can steer the sector in the direction of sustainable development - harnessing opportunities for sectoral learning, growth, and competition. Mining can support the development of local manufacturing, and spark export-led growth. This can be done by targeting sectors for policy support, where there is high potential for:

1. tax collection and enforcement
2. export-led growth
3. learning spillovers
4. supply-chain resilience

The mining sector has a notorious challenge of accounting revenues for taxation. Limited generation of revenue from mining operations can result in no-growth or a decline in national growth, as seen in the case of Zambia. The mining sector can have devastating effects on the local economy and population, such as the case of the Democratic Republic of Congo (DRC) where taxes are not efficiently collected and workers remain unprotected in dangerous, informal mining roles.

The shift to extraction and production of raw natural resources can lead to less investment in the manufacturing sector. In this shift, manufacturing is crowded out, and an economy is left exposed to global price volatility of the resource commodity without any other competitive sectors. This leads to a lack of diversity in the economy, and structural challenges if the commodity price drops. Countries which invest in other sectors along the value chain, including upstream services and downstream production and refining can avoid losses due to global market volatility.

Still, investment in resource extraction does not guarantee growth. In an economy abundant with natural resources but constrained in fiscal and state resources, the mining sector can lead to underinvestment in other industries with increasing returns to scale. Particularly if the sector that is competitive is export-driven, the country will likely experience a similar crowding out of manufacturing. For example, South Africa has multiple mineral resources, including the majority of the world’s manganese, but continues to have high levels of poverty.

Figure 3: Manganese production in African countries

Note: Percentage indicates the share of global production in African countries. Source: World Mining Data (2021).

Co-location of renewable energy generation and mining can keep supply chains resilient to changes in fossil fuel refining, transport, and import costs. Renewable energy development can create value addition to the supply chain, and offer enhanced opportunities for a win-win in both expansion of upstream sectors and meeting buyer’s increased demand for lowering supply chain emissions. If minerals are to be extracted, sourcing electricity from renewable energy projects can suppress energy costs and reduce volatility from the global oil and gas markets.

The benefits of co-developing the mining and manufacturing sectors

Many industrial policies can be deployed to capture non-tax and tax revenues from the development of the mining sector. One such policy is local content requirements (LCR) which can require firms with the right to mine to meet requirements on hiring to capacity building. In some cases, LCR can harm the efficiency of an industry, particularly if the recipient pool is too narrow. The application of LCR to capture the positive spillover benefits from knowledge sharing and joint infrastructure should be highlighted. For example, the Inter-governmental forum on minerals, mining, and sustainable development (IGF) recommends horizontal linkages across the value chain. In this case, critical export infrastructure (roads, ports, water treatment) is shared between the mining sector and another productive sector, resulting in lower operating costs for both industries.

LCR is within the umbrella of industrial policies which can increase the local benefits of the mining industry. LCR can be successful in the case where:

• Local production of inputs that can be improved with technology or through lower cost when imported should not be made. For example, upstream services should be provided by domestic firms. In Zambia, only 4% of firms providing non-core goods and services were provided by local firms, according to a 2012 survey of the sector.
• Flexibility to allow the mining sector to implement cost-efficient technologies is necessary. We would urge states to avoid locking in local technological requirements to ensure the sector remains competitive in the export market.
• Training and requirement programmes can be effective. But strict standards on local employment policies may reduce competitiveness of the industry where training or skills gaps exist. Local employment requirements may reduce necessary knowledge spillovers. Policies to incentivise hiring local employees and policies requiring local training and skill development are recommended.

In the global shift towards renewable energy and electrification, resource-rich nations can effectuate supply with energy sourced from the high availability of renewable resources like solar and wind. High renewable energy potential and natural resource availability has the potential to be a strong combination for providing low-emissions materials to further progress on electrification. In all of Africa from 2010 to 2018, only 4 GW of new solar capacity was added, despite an estimated 660,000 TWh of potential PV across the region. Today, the cost of renewable energy in some African countries is competitive with fossil fuel energy, particularly where potential is high and there low seasonality in solar availability.

Figure 4: Yearly average of solar photovoltaic potential in kWh/kWp

Notes: In northern, southern, and western Africa, average PV output is consistently high. Source: Global Solar Atlas (2023).

The co-development of large-scale renewable energy projects can help meet the input demand of the mining sector. This could spur a positive growth cycle. Renewable energy deployment could be incentivised with subsidised credit to overcome financing barriers. Alternatively, a guaranteed contract with industry, a commercial power purchasing agreement, can also reduce uncertainty in tariff recovery, further lowering the risk of the project. Additionally, renewable energy, such as solar and wind, will have a lower transportation cost due to its proximity to a mining site - reducing the input price. The co-location of production facilities to energy facilities creates a unique opportunity for efficient, stable, and low-emissions electricity access in an industrial sector with high energy inputs.

Finally, fiscal regulations should protect countries from commodity price shocks, with some experimentation of novel tools. One such example is indexing commodity prices to debt. While this may have seemed difficult in previous years, with more policy certainty around the demand for electric vehicles and renewable energy technologies, certain commodity debt bonds could be attractive and stable investments. This would support the macro-stability of a resource-rich economy starting the development process.

Early planning is essential for sustained growth

The mining sector in developing countries has the potential to secure long-run, export-driven growth where industrial policies can guard against extractive growth. To maintain comparative advantage in the extraction and production of critical minerals in the energy transition, resource endowment and other factors that are primarily influenced by the capacity of the state, need to be considered in tandem.

The timeframe to make decisive resource management strategies for critical minerals is urgent. Under the IEA’s two-degree scenario, production of key minerals graphite, lithium and cobalt will need to increase by 450% from 2018 levels. A strong and enforceable industrial policy in resource-rich countries should be under deep consideration by developing countries during the energy transition.

• Domestic industries must invest in minerals with enough flexibility to adapt to future technologies and changes in global demand. This includes critical minerals that are needed in multiple emerging technologies.
• Mining practices should be low pollution, where costs are comparable, and enforcement is available. This can ensure resilience in the global supply chain as international and voluntary agreements are increasingly demanding transparency and pressure to limit supply chain emissions. 
• Incentives for industrial co-location of renewable energy and other industrial and manufacturing sites should be created in line with the positive learning externality. Investments in value-added sectors can further strengthen the value of investments made in the domestic extractive sector.

Creation of a diverse and local industrial sector can help resource rich countries maintain a comparative advantage in extraction and production of critical minerals.