Identifying Obstacles to Downstream Integration

At a Glance
  • Consultation processes allow for potential investors to understand the position of government and the resources that government is prepared to commit to establishing 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 and/or compulsions.
  • Consultation alone may be sufficient to induce investment downstream in cases where the natural resource is unique, or at least replicated in very few situations.
  • In deciding whether to enter into refining and further downstream processing, it is important to recognize that governments may achieve greater policy aims by focusing on other parts of the value chain, such as local procurement.

Governments contemplating supporting downstream production should consult with potential downstream investors so that they can identify the obstacles that are preventing or inhibiting them from investing. Based on this understanding, governments contemplating supporting downstream production should also ascertain what inducements or incentives to support investment in downstream activities intended to overcome these identified obstacles are likely to be most effective.

Consultation processes also allow for potential investors to understand the position of government and the resources that government is prepared to commit to establishing downstream production. In short, consultations allow for government and potential investors to reach a mutual understanding of each other’s positions. Policies that are based on such an understanding are far more likely to achieve government’s objectives in supporting downstream production.

In summary, consultation with potential investors is a necessary first step for any government in the design of policies in support 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 compulsions.

One situation in which consultation alone may be sufficient to induce investment downstream is where the natural resource is unique or, at least, replicated only in very few situations. In such a situation, potential investors may be prepared to invest downstream in order to get access to the scarce resource that they require.

Botswana is such a case. In 2005, De Beers was required to renew the mining license for Debswana – a 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 domestic cutting and polishing. The government had considerable leverage. De Beers obtained some 60% 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 negotiation with the Botswana 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 business – selecting and mixing the diamonds from DeBeers mines for its customers – from London to Gaborone.[2]

However, instances of government having such bargaining power through access to a scarce resource and using that bargaining power to negotiate investments downstream are rare. Moreover, even in a situation where government does possess such bargaining power, requiring investment downstream in return for access to the resource, may not ultimately be optimal for further development. As discussed in Factors to consider in deciding whether to enter into refining and further downstream, the government may achieve more policy aims (employment, tax revenue, etc.) by focusing on other parts of the value chain, such as local procurement.

In the case of Botswana, a domestic diamond aggregating, cutting and polishing industry was indeed established. Approximately 30-35% of the world’s rough diamonds are now sold in Gaborone and some 3,500 jobs have been developed in diamond cutting and polishing.

View footnotes

[1] Baissac et al., Zimbabwe’s Beneficiation Policy Part 1: Understanding the drivers and objectives, (Eunomix research, 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, (Open University, 2011), 28; Mike Morris and 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 Open University, 2012), 252

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