Identifying Obstacles to Downstream Integration

At a Glance
  • Consultation processes allow potential investors to be better understand the government's position and the resources it is prepared to commit to downstream production. 

  • Consultations help to facilitate mutual understanding, and policies based on such understanding are far more likely to achieve defined objectives in supporting downstream production.

  • In most cases, governments wanting to enhance downstream production will have to offer incentives or penalties.

  • Consultation alone may be sufficient to induce investment downstream in cases where a natural resource is unique or rare.

  • Governments may achieve more of their policy aims by focusing on parts of the value chain other than downstream processing, such as local procurement.

Case Studies

Key Resources

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Topic Briefing

Governments contemplating supporting downstream production would do well to consult with potential downstream investors to identify any obstacles to investment. This will help clarify which government incentives are likely to be most effective in attracting investors.

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Consultation with potential investors is a necessary first step when designing policies to support downstream production. Consultation processes allow mutual understanding. Policies based on such an understanding are far more likely to achieve the governments objectives in supporting downstream production.

It may be that in the interest of maintaining good relations with government, consultation alone is enough to persuade potential investors. However, this is rare. In most cases, governments wanting to enhance downstream production will have to offer incentives and/or penalties.

One situation in which consultation alone may be sufficient to induce investment downstream is where the natural resource is unique or rare. Botswana is such a case. In 2005, De Beers was required to renew the mining license for Debswanaa 50/50 venture between De Beers and the Botswana government. The Botswana government entered into negotiations with De Beers, seeking the company’s aid in developing the domestic cutting and polishing industry. The government had considerable leverage. De Beers obtained some 60 percent of its diamonds from Botswana, and the country was the source of an even larger share of high-quality gem diamonds. In order to retain its profitable diamond sales, De Beers had little option but to enter into negotiations with the government.[1]  An agreement was reached whereby a share of locally mined rough diamonds were set aside and allocated to the domestic cutting and polishing industry. The companies that received these diamonds were required to hire and train locals. De Beers also agreed to move its aggregation businesswhere it selected diamonds for its customersfrom London to Gaborone.[2]  

A domestic diamond aggregating, cutting, and polishing industry was thus established. Approximately 30-35 percent of the world’s rough diamonds are now sold in Gaborone and some 3,500 jobs have been developed in diamond cutting and polishing.

However, instances of a government having such bargaining power and using it to negotiate investments downstream are rare. And even where such bargaining power exists, requiring investment downstream in return for access to a resource may not ultimately be optimal for further development. As discussed in Factors to Consider before Moving Downstream, when deciding whether to move downstream, the government may achieve more policy aims (in terms of jobs, tax revenue, etc.) by focusing on other parts of the value chain, such as local procurement.

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[1] Claude Baissac et al., Zimbabwes Beneficiation Policy Part 1: Understanding the Drivers and Objectives, Eunomix Research, Sandton, South Africa, 2015, 32.

[2] Mbayi 2011, cited in Mike Morris, Rachel Kaplinsky, and David Kaplan, “One Thing Leads to Another Commodities, Linkages and Industrial Development: A Conceptual Overview,” MMCP Discussion Paper No. 12, Making the Most of Commodities Programme (MMCP), Open University, 2011, 28; Mike Morris, Raphael Kaplinsky, and David Kaplan, One Thing Leads to Another. Promoting Industrialisation by Making the Most of the Commodity Boom in Sub-Saharan Africa (University of Capetown and the pen University, 2012), 252.