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Sector Case Study: Mining
The investment and operating environments in Ghana and Mozambique are seen as limiting the establishment and growth of local businesses, as well as the development of supply relationships between mines and domestic suppliers. In contrast, a number of stakeholders mentioned the stable, probusiness, and competitive investment environment in Chile as a key driver in the development of its local supply industry and wider economic success. This competitive environment resulted from wide economic reforms implemented between 1973 and 1990, which supported nondiscrimination toward foreign businesses through elimination of trade barriers. In Sub-Saharan Africa, lack of access to business premises, unreliable supply of utilities, high costs of capital, and difficulties accessing finance are some of the key challenges that make it difficult for entrepreneurs firstly to establish businesses and secondly to compete effectively with foreign-owned suppliers. In Ghana, a high cost base, and, in some cases, unreliable services and utilities (particularly electricity), impede the ability of local enterprises to invest and develop capacity to serve foreign suppliers. In particular, the high cost of capital (for example, interest rates of over 30 percent), high costs of property rental, and high electricity costs were all raised by stakeholders as prohibitive. Also, the limited nature of industrial activity in Ghana means that many inputs and raw materials cannot be sourced locally but must rather be imported. Furthermore, increasing competition with the growing oil and gas sector for services, skills, and facilities has been mentioned as contributing to a rising cost base for local enterprises. The available skills base also affects domestic businesses, and their ability to form and deliver on supply relationships with mining companies. Chile’s strong skills base has been highlighted as contributing to the development of a strong local supply base. The government emphasizes tertiary education and spends 1.8 percent of its gross domestic product (GDP) on tertiary education—more than the Organisation for Economic Co-operation and Development average of 1.6 percent. Notably, Chilean engineering degrees are six years in duration, which mining subcontractors in Chile have noted as providing a competitive advantage over the four-year undergraduate programs in the United States, as engineers entering the labor market are more focused on their engineering careers (Fernandez-Stark, Bamber, and Gereffi 2010). Weak contract enforcement was identified by stakeholders as a key issue that has a negative impact on the development of linkages between foreign and local companies. In Ghana, difficulty enforcing contracts was identified as a key issue by mining companies. This is because the inadequate legal environment limits the ability of firms to take legal action against suppliers in case of nondelivery or delay in delivery of mine-critical inputs—making the risk of local sourcing unmanageable. A related point is the actual or perceived lack of transparency in how contracts are often awarded (particularly among state-owned companies). Overall, Chile is regarded as relatively corruption free according to Transparency International’s Corruption Perception Index, while Ghana and Mozambique perform substantially worse.5 Making Foreign Direct Investment Work for Sub-Saharan Africa • http://dx.doi.org/10.1596/978-1-4648-0126-6