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Buy Zimbabwe champions local content regulations

THE Government of Zimbabwe has in recent years promulgated a number of statutory instruments aimed at safeguarding local producers from foreign competition.

Kipson Gundani

The recent Statutory Instrument 64 of 2016 attracted a lot of attention both locally and regionally. Notwithstanding the controversy regarding SI 64, the impact of the instrument together with previous measures, such as those applied to the cooking oil and dairy sectors, have yielded positive results which inter alia include: increase in capacity utilisation and employment; new investments and improvement in fiscal space as reported by the Zimbabwe Revenue Authority.

In as much as the measures have successfully worked to save the selected sectors, they cannot foster sustainable solutions to Zimbabwe’s competitiveness problems because the measures by themselves are temporary and are constrained from covering the entire economy due to bilateral, regional and multilateral agreements Zimbabwe is a signatory to.
Following SI 64 and its resultant benefits, Buy Zimbabwe is now looking at this issue from a different perspective.

Buy Zimbabwe came up with the idea of local content regulations (LCRs) as a way of sustaining the reduction in the import bill and stimulating re-industrialisation. Local content requirements (LCRs) are policy measures that typically require a certain percentage of intermediate goods used in the production processes to be sourced from domestic manufacturers. They constitute smart protectionism measures, which are in force in developing countries, emerging and developed countries and they have become a dominant feature of the trading system since the 2007/8 global financial crisis.

There is overwhelming evidence that LCRs are in compliance with World Trade Organisation (WTO) provisions. The most relevant agreements on compliance of LCRs are the General Agreement on Tariffs and Trade (GATT), the Agreement on Trade-Related Investment Measures (TRIMs), the General Agreement on Trade in Services (GATS), the Agreement on Subsidies and Countervailing Measures (ASCM), and the Agreement on Government Procurement (GPA).

However, in many cases, LCRs are not only trade related, but essentially investment related. Therefore, international and bilateral investment agreements also largely regulate the extent to which signatory countries can use (or not) certain measures to oblige foreigners to use more local content.

It is important to differentiate local procurement and local content regulations.

The local content is biased towards procurement of locally produced goods. Local procurement, on the other hand, fosters supporting a motion for locals to be given procurement tenders with no legal requirement to buy them locally.

LCR seeks to add value to locally produced goods and services and also to propose a minimum local content threshold for different sectors in Zimbabwe. It will identify, specify and favour subsectors that are developing or within easy grasp rather than beyond feasible reach.

It is the conviction of Buy Zimbabwe that, local content requirements can present an attractive solution to allow infant industries to become internationally competitive by providing incentives for local firms to produce and eventually innovate lowering their production costs over time. By requiring firms to use a certain percentage of local inputs, demand for domestic industries will increase, stimulating job creation.

A look at case studies elsewhere shows that local content policies have probably been the single most important policy driver of linkages from the commodity sector. It is critical for such policies to be evidence-based and well informed rather simply stated without clearly set and measurable objectives.

Although it is difficult to make an overall assessment of the impact of LCRs in resource-rich countries, in part due to lack of empirical evidence but also because experiences vary significantly across countries, there is somewhat evidence that LCRs managed to bring the expected gains.

In some countries, as the World Economic Forum has noted, there are many cases where measures have failed to achieve their stated objectives due to a lack of capacity to implement, manage, and monitor LCRs.

Countries that have been successful in using LCRs have all used a combination of quantitative and qualitative measures, based on their capacity to deliver, while ensuring a fair balance between their economic objectives and the viability of investments.

In Nigeria, despite strict quantitative targets for employment and local sourcing, satisfactory results in practice have taken time to materialise due to the insufficient capacity of local suppliers to meet targets or the unavailability of sufficient skills to be absorbed by the industry.

While quantitative LCRs may work, they are in themselves not sufficient to stimulate the development of local suppliers, employment of local staff, transfer of technology, or creation of national champions. They need to be accompanied by other policies.

For instance, Similarly, Malaysia and Chile simultaneously established strong partnerships with foreign firms, while at the same time supporting local suppliers (and small and medium-sized enterprises (SMEs) in the case of Brazil) by identifying gaps and facilitating their interaction with foreign firms.

In Nigeria, 1% of the total value of contracts awarded in the upstream sector goes to a Content Development Fund to support training and business support services.

South Africa and Malaysia have established skills development funds where extractive industries have an obligation to contribute. In Brazil, a share of royalties goes to the Oil and Gas Sectorial Fund to support specialised training and capacity building. Initiatives led by foreign companies, development agencies (such as the World Bank), and chambers of commerce are an essential element in the success of LCRs.

For instance, a world-class supplier programme was set up in Chile by BHP Billiton to stimulate the emergence of reliable and competitive local suppliers and build a knowledge-based mining sector. This programme was distinctive on several fronts.

The company identified and presented an operational challenge to suppliers instead of simply requesting existing, standardised solutions. This created a demand for innovation, which built a better alignment with market needs and improved the use of resources, and therefore created a secured and tailor-made market for suppliers.

In Ghana, inspired by its experience in Peru, Newmont, in partnership with the World Bank and the Chamber of Mines, developed a programme to support the development of local businesses to supply goods and services, and upscale the capacity of business associations to provide sustainable business support, training, and other services to the local business community. This multi-stakeholder programme led to the creation of an ecosystem of business opportunities around the mining area, including in non-mining activities, such as agriculture.

In South Africa, Anglo American launched a Small Business Initiative to provide opportunities for SMEs, in particular for historically disadvantaged populations. Mozambique also has a good track record of collaborative partnerships with the private sector to scale up business linkage programmes.

For instance, the Mozal aluminium smelter was designed and implemented in partnership with a range of stakeholders to stimulate and strengthen local business capacities and enable small enterprises to compete for contracts at different stages, from construction to ongoing operation.

Zimbabwe is endowed with significant resource wealth. So far, these factors have not contributed to the achievement of inclusive and sustainable economic development.

By pursuing good policy, which in particular promotes industrialisation and allows Zimbabwe to defend against foreign product infiltration, Zimbabwe will be better able to achieve sustained economic growth.

It is clear that policies and measures involved in ensuring that Zimbabwe maximises its benefit from its resources, are cross cutting in nature, and such coalescing around local content will usher a new era of re-industrialisation to our beloved country.

Gundani is the chief economist of Buy Zimbabwe. New Perspectives articles are co-ordinated by Lovemore Kadenge, President of the Zimbabwe Economics Society E-mail kadenge.zes@gmail.com and cell +263 772 382 852.

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