A look at the legal and economic implications of export restrictions and their impact on resource exploitation across Africa. For potential investors considering the viability of investment in process industries across Africa.
The Organisation for Economic Cooperation and Development (OECD) has defined raw materials as ‘the minerals and metals that are crucial inputs for the capital and consumer goods industries around the world and the agricultural commodities that supplement domestic food supplies in many countries and sustain the global food processing industry’.1
Although the abundance of raw materials creates significant economic opportunities for resource-rich African countries, this has yet to translate into sustained growth and development for these countries. In fact, income generated from natural resources is typically unconnected to other higher value economic activities.
we explore the export restrictions by which African states are seeking to secure wider economic benefits from resource exploitation. We assess the wider legal and economic implications of such measures, and look at the factors to be assessed by potential investors when considering the viability of a particular investment opportunity in the process industries in these countries.
In order to stimulate investment in domestic downstream processing industries and to move domestic industry up the value chain, countries in Sub-Saharan Africa are increasingly using direct or indirect restrictions on the export of raw materials.
The effect of these export restrictions on downstream sectors is to increase supply at lower prices as competition from export markets for those raw materials is undermined or even eliminated.
It is expected that this will stimulate domestic and foreign investment in the local manufacturing and processing sectors. Boosting exports of ‘value added’ goods will in turn generate higher export and tax revenues and create jobs and opportunities for the wider population.
This move by African states is seen by many to present a significant opportunity for the international investment community.
Export restrictions can take the form of ‘tariff’ restrictions or ‘non-tariff’ restrictions.
Minerals and metals
Waste and scrap
Source: Export Restrictions in Raw Materials Trade: Facts, Fallacies and Better Practices, Organisation for Economic Cooperation and Development (2014)
Note: for industrial raw materials, information relates to the period 2009-2012. For agricultural commodities, information relates to the period 2007-2011.
|Country||Export tax||Licensing requirements||Export prohibition|
|Cote d’lvoire||Waste and scrap of iron and steel||Waste and scrap of iron and steel|
|Gambia||Waste and scrap of gold, platinum, silver||Diamonds|
|Ghana||Precious metal ores||Waste and scrap of cast iron and steel|
|Kenya||Waste and scrap of cast iron, steel, tinned iron or steel, copper, aluminium and zinc|
Base metals or silver
|Nigeria||Waste and scrap of cast iron, stainless steel, copper, aluminium and iron|
Tantalum or vanadium ores
|Waste and scrap of iron and steel|
|South Africa||Diamonds||Lead ores
Waste and scrap of gold, iron, platinum, steel and tinned iron
|Tanzania||Waste and scrap of iron, steel, copper, aluminium and zinc|
|Uganda||Non-agglomerated iron ore||Waste and scrap of cast iron, steel, copper, aluminium and zinc|
|Zambia||Waste and scrap of cast iron, stainless steel, alloy steel, copper, aluminium and zinc||Waste and scrap of cast iron, stainless steel, alloy steel, copper, aluminium and zinc|
|Zinc||Waste and scrap of magnesium and tungsten|
|Zimbabwe||Chromium ores and concentrates|
Source: OECD Inventory of Restrictions on Trade in Raw Materials, Organisation for Economic Cooperation and Development (2014)
Whilst there are economic benefits to be achieved from the introduction of export restrictions, for a domestic economy the impact on the ability of foreign countries to compete may be significant.
First, there is the initial impact of a constriction in global supply of the raw material. Second, a significant impact on world prices may be felt, particularly where the country imposing the restrictions has a major share of the world production of the relevant raw material. The much-publicised export restrictions placed by China on rare earths were controversial for this reason, as 95 per cent of the world's production of rare earths comes from China. In this context, export restrictions could potentially have the effect of putting foreign downstream producers out of business owing to the pressure they create on the global supply of the relevant raw materials by countries in the Sub-Saharan region.
Achieving a reduction in export restrictions on raw materials has, therefore, become a key policy objective for the European Union (EU) and the United States, both of whom rely heavily on imports of critical raw materials for their industries from countries having near monopoly positions on supply.
The EU, in particular, over the last few years has been looking to use multilateral trade agreements at the World Trade Organisation (WTO) level as well as bilateral trade agreements, called Economic Partnership Agreements amongst other measures, to curb the regulation of exports on key raw materials.
At an international level, multilateral trade agreements seek to control the extent to which countries may limit their exports, with a view to opening up international trade and preventing the anti-competitive effects that restrictions on exports may have.
Many countries in the Sub-Saharan region are members of the World Trade Organisation (WTO), and are therefore subject to the WTO regulatory regime. The key legal requirement under the WTO regime is Article XI of the General Agreement on Tariffs and Trade 1994 (Article XI). Article XI requires WTO members to eliminate prohibitions and quantitative restrictions on exports (unless one of the limited number of exceptions apply).3 WTO member states are, therefore, not permitted to impose export prohibitions and quantitative restrictions such as exports quotas. Tariff restrictions such as export taxes are, however, a permissible trade policy tool under Article XI.
It is worth noting that very few disputes relating to the imposition of export restrictions have actually been brought before the WTO Disputes Settlement Body.
The EU has in the past sought to secure elimination of export taxes at the WTO level, but such proposals were rejected by other WTO members and criticised by developing countries who, as this article has described, see such taxes as an important policy tool to promote domestic local value addition and industrial development.
Since the EU did not succeed in getting its way on export taxes in the WTO, it shifted its efforts to negotiating regional Economic Partnership Agreements (EPAs) in Africa.
Currently there are five regional African EPAs being negotiated – West Africa, Central Africa, Eastern and Southern Africa, Eastern African Community, and the South African Development Community – each being at a different stage in the treaty process. Some of these are pending signature and ratification, and some are in provisional application.4 Provisional application does not, however, impose legally binding obligations and can be terminated at any time, pending formal ratification.
The EU has sought to include a clause on export taxes in the draft EPAs that would prohibit African countries from introducing any new export taxes, as well as from increasing those currently applied. In exceptional circumstances, and only subject to agreement by the European Commission, could export duties be temporarily introduced under the proposed provision.
Negotiations with African regions have proved difficult for the EU with African states asserting that the abolition of export taxes would remove the policy space which enables them to encourage domestic value addition. Moreover, they point to the fact that export taxes are not prohibited under WTO rules and assert that the WTO is the right forum for any such debate. Accordingly, none of the EPAs with the African regions have to date been concluded and ratified.
Whilst the implementation of export restrictions may be justified on the basis of a boost to in-country downstream manufacturers, the measures could, of course, impact on the fortunes of domestic upstream players, such as mining companies who typically invest a great deal of money in exploration and development before mineral extraction takes place. Their decision to invest in primary extractive industry will have been driven to a great extent by commodity price projections. The effect of export restrictions on commodity price, coupled with capacity constraints in the downstream sector could, however, undermine their investment decisions and place the growth of extractive industries under stress.
It is apparent then that plans to implement export restrictions must take account of the impact on producers of raw materials. It would be disastrous if the measures undermined primary extraction. Export restrictions must, therefore, be backed by strong regulation and support for the domestic extractive industries to prevent any damaging impact on the relevant parties. Encouragement of partnerships between producers and processors, and reserving certain existing processing capacity for ‘open use’ are kinds of regulatory features that African states should contemplate as they seek to take full advantage of export regulation and to effectively achieve domestic value addition.
There are several key factors that a potential investor will need to consider before making a decision to invest in Africa's processing and manufacturing sector.
We use the example of the copper processing sector in Zambia opposite to identify some of the key considerations that potential investors in Zambia’s downstream copper sector may need to factor into their investment decision. This is not an exhaustive or definitive review, but should hopefully provide the reader with a flavour of the issues at hand.
Opportunities for investment in copper smelter processing in Zambia
|Market considerations: what are the medium to long term global demand and price projections?||
Global supply of copper is expected to peak tin 2015 at around 20 million tonnes, with a decline to follow thereafter. It is expected that global demand for copper will however increase year-on-year by three per cent, reaching 25 million tonnes by 2020.
The recent fall in copper prices is generally viewed by analysts as the result of short term market volatility and uncertainty around the general health of industrial economies, as opposed to any deterioration in fundamentals.
Whilst there is some downgrading of future demand growth projections from China, the longer term view is that there will remain a supply gap which is likely to mean copper prices will improve, and long term forecasts are generally positive.
Even projections of oversupply for this year have been downgraded as production from the likes of Glencore and Rio Tinto fell short of projections (mainly due to technical issues).
|Supply considerations: will sufficient supplies of ‘input’ raw materials be available domestically?||
Copper is the main mineral resource in Zambia.
In 2010, Zambia was the seventh largest global producer of copper in terms of mine production volume, with annual production at 715,000 tonnes.
Zambia is expected to become one of the world’s major copper producers in the near future, driven by high grade reserves and several expansion plans by the likes of First Quantum at its Sentinel and Kansanshi mines.
The projected increase in copper output in the coming years is expected to make Zambia one of the five highest copper producers in the world.
There is also increased copper mine production capacity in neighbouring DRC, increasing the need for copper beneficiation and smelting in Zambia. Clearly, this also raises the possibility of competition from copper processing capacity in the DRC.
|Capacity considerations: what scope is there for further domestic processing capacity?||
It is estimated that there is a current shortfall in copper smelting and refining capacity in Zambia of 300,000 tonnes per year.
Whilst it appears that there are plans by existing miners to construct their own smelters, it is not clear if and to what extent current and future capacity shortages will be met. Further analysis would be required in this regard.
|Export restrictions: what form do local export restrictions take and do they fall within prohibitions under international treaties?||
With an export value for refined copper and copper alloys accounting for over 60 per cent of copper’s aggregate trade value, there is clearly potential for value addition through in-country processing.
The Zambian government has been actively encouraging domestic value addition of metals.
Key to this has been the introduction of a 15 per cent export tax on copper and cobalt concentrates.
All the countries in the Eastern and Southern Africa region, except Eritrea, are members of the WTO. Tariff restrictions, such as export taxes are, however, a permissible trade policy tool under Article XI.
The EU is currently negotiating an Economic Partnership Agreement with Djibouti, Eritrea, Ethiopia, Sudan, Malawi, Zambia, Zimbabwe, Comoros, Mauritius, Madagascar and the Seychelles.
In August 2009, Madagascar, Mauritius, the Seychelles, and Zimbabwe signed an ‘interim’ Economic Partnership Agreement with the EU. Zambia, however, has not signed the interim EPA.
In negotiations to date, the Eastern and Southern African Counties maintained their position that they require policy space to impose export taxes to encourage industrial development without prior approval of the European Commission.
Zambia gets an annual rainfall of 1000mm and has relatively abundant underground and ground water sources. This is favourable to copper beneficiation since refined copper is produced mainly by the solvent extraction electro winning method, which requires large quantities of fresh water.
There is strong local support for investors through the Zambian Development Agency.
There is a comprehensive tax incentive regime for the mineral beneficiation sector, including corporate tax discounts, ability to carry forward losses for up to 10 years, VAT relief, capital allowance relief and tax reliefs based on levels of capital expenditure on industrial building construction.
Zambia has a relatively stable political system.
Investment guarantees are available against state nationalisation.
Repatriation of profit and dividend can be achieved free of charge.
In pursuit of domestic value addition, export restrictions are likely to remain high on the agenda for many states in Sub-Saharan Africa. It would appear that many of the export restrictions being utilised are unlikely to contravene multilateral trade agreements (and even if they do, the risk of challenge appears remote for the time being). Furthermore, moves by the EU to abolish export taxes under the terms of the regional trade and investment agreements appear unlikely to see the light of day in their current form in the near future.
It is clear then that there may continue to be potentially lucrative opportunities for investment in the right project in the right jurisdiction. To many potential investors – particularly those who haven’t previously ventured into a particular African country or indeed the African continent – the risks may appear daunting at first. However, it is our experience that on the right terms and with the right partners, these projects are no more or no less risky than similar projects elsewhere in the world, with potentially far more attractive returns on investment. Thorough due diligence is, of course, an important first step in the process for potential investors, and therefore aligning themselves with advisers and partners who have been there and done it before is crucial.
From a legal and regulatory perspective, this will require use of experienced international counsel who have a sound understanding of the particular local and project-specific risk issues and that will need to be addressed contractually or through other appropriate mitigation strategies, and also have relationships with reputable and experience local lawyers on the ground.
The advice required will relate not only to plant construction and operation,5 but also advice relating to:
- setting up business in a particular country
- local regulatory and tax environment
- international regulation (including risk of legal challenges to export restrictions on which the investor may indirectly rely)
- other ‘country specific’ issues, such as political risks and corruption risks (including identification of appropriate mitigants)
- best practices drawn from similar projects in other parts of the world.
Restrictions on the export of raw materials in African countries present a great business opportunity which, when combined with preparation and openness, could lead to more than one success story.
Export Restrictions in Raw Materials Trade: Facts, Fallacies and Better Practices, Organisation for Economic Cooperation and Development (2014)
A Willems et al, The EC and US WTO Challenge to China’s Export Restrictions: Will It Increase Their Downstream industries’ Competitiveness?, 2009 International Trade Law & Regulation 171.
These exceptions to the Article XI requirements include measures temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the party, and certain generally applicable exceptions relating to protection of human, animal or plant life or health, conservation of exhaustible natural resources and domestic stabilisation plans where the domestic price for raw materials is held below the world price to ensure essential quantities of domestic materials are available to the domestic processing industry (provided these are not 'protectionist' or discriminatory in nature).
European Commission, Overview of EPA negotiations (Updated October 2014)
As a practice, we produce comprehensive guides on legal and commercial issues with regard to the construction and operation of process plants. These guides are accompanied by more focused country guides which cover most Sub-Saharan African countries.