Kenyan Crude Oil Headed to the EU?

Despite the oversupply of oil, low prices and high transport costs, Kenyan crude oil from the Turkana region is apparently headed for the EU. Civil Society is apparently calling first for the construction of a pipeline to transport the oil but seems the oil will be transported by trucks and trains which is costly.

Read more here.

Lesotho Making Billions Selling Water to South Africa

Even though Lesotho has high debt levels and high unemployment, it is raking in billions by selling water to South Africa. South Africa gets water from the landlocked mountainous kingdom through a series of tunnels and dams given that Lesotho receives 60 percent more rain than its neighbor. This transfer is accomplished through a series of rivers which include the Malibamatso, Matsoku, Senqunyane and Senqu, while in in South Africa it involves the Vaal River. This water transfer is said to be Africa's largest water trade scheme.

There is a signed Treaty between the two governments which sets out the structures required to implement the water transfer Project on behalf of the two governments, through an implementing management structure known as the Lesotho Highlands Water Project will also generate hydro-electric power.

For more details click here.

New Tanzanian Mining Law Requires 50% Local Public Ownership

News From The East African

A new mining law, requiring foreign-owned companies to cede a 50 per cent stake to the public in Tanzania, is threatening to cripple the thriving $500 million Tanzanite gemstone business.  One company, TanzaniteOne, has rejected a demand by the government to relinquish half of its shares to the State Mining Corporation (Stamico), setting the stage for a major dispute.

TanzaniteOne, a multinational listed on the London Stock Exchange, said it could not dispossess its investors of their shares.  Instead, the firm, which extracts Tanzanite in the Mererani Hills, about 40 kilometres southeast of Arusha, offered to offload 20 per cent of its shares through an IPO at the Dar es Salaam Stock Exchange Executive chairman Ami Mpungwe said the firm’s shareholders comprised institutions like pension funds, whose interests could not be taken for granted. They could not be dispossessed of their shares through a “simple announcement.”  But Mr Mpungwe said the company was negotiating a solution with the State.

The new Mining Act of 2010, which became effective this year, requires foreign-owned companies to cede 50 per cent of their stake to the public or lose their mining permit.  The matter is urgent for TanzaniteOne, as its licence expired in August 2012 and the government is threatening not to renew it until the firm surrenders the 50 per cent shares.  Deputy Minister for Energy and Minerals Stephen Masele told The EastAfrican that the firm must relinquish the stake to Stamico as a precondition for renewing its operating licence.  “The company wants the state to buy the shares, but our position is that the firm ought to offload the stocks to Stamico free of charge or else lose the licence,” said Mr Masele.

The new law stipulates that gemstones will be exclusively mined by Tanzanian nationals, unless the mining requires heavy investments and sophisticated technology, where foreign investors will be allowed, but on condition they offload 50 per cent of their shares to the public.  Lusekelo Mwakalukwa TanzaniteOne corporate governance manager told The EastAfrican that the company has invested heavily in its designated mining block and has just started to realise profits.  He adds that the firm has also been paying revenue, including corporate taxes, royalties and other related income to the government.

Increased production

Bernard Olivier, chief executive officer of Richland Resources, which owns TanzaniteOne, says production at the   mine is still rising at a record 2.4 million carats in 2011 with decent grades.  The firm employs 650 people and has paid $26 million in tax over the past five years.C  ash costs per carat are rising too, however, from $1.41 a carat in 2005 to $3.69 in 2010. While the company made a $6 million profit in 2008, today that figure is less than $1 million. Mr Olivier says prices are still 20 per cent below those of 2008.

TanzaniteOne, operating in an eight square km block ‘C’ tanzanite site, planned to produce and export 2.5 million carats worth $24 million in 2012.  Records show that TanzaniteOne has invested over $100 million, but analysts say the company has provided marginal contributions to the communities surrounding its area of operation.  “I don’t see a significant impact of TanzaniteOne’s investment on nearby communities,” said Dr Gasper Mpehongwa, a lecturer in development studies at Tumaini University.  However, records show that TanzaniteOne provides over 2,000 villagers and 4,500 cattle with water at Neisinyai village in Mererani Hills.

New Database On Global Value Supply Chains

The European Union has launched the new "World Input-Output Database" which allows trade analysts to assess the global value chains created by world trade. These added-value chains have become an essential feature of economic reality as trade is becoming increasingly globalised as today's traded products are not produced in a single location but rather are the end result of a series of steps carried out in many countries around the world. Instead of counting the gross value of goods and services exchanged, the new database reveals the value added embodied in these goods and services as they are traded internationally. The findings are significant as they change the perception of the competitiveness of certain sectors in some countries. 

In addition, policy makers and societies at large are facing increasingly pressing trade-offs between socio-economic and environmental developments. Increases in production induce growth in the use of non-renewable resources such as fossil fuels, materials, land and water. Furthermore, they generate higher levels of waste and emissions of environmental pollutants. Simultaneously, increasing global integration through international trade and technological developments creates a tension. In this regard, the database considers satellite accounts with environmental and socio-economic indicators, from which industry-level data can provide the necessary input to several types of models used to evaluate policies aimed at striking a suitable balance between growth, environmental degradation and inequality across the world.

Karel De Gucht, the EU commissioner for trade has said that the change in statistical accounting for trade applied in the database has been developed to determine the consequences of the fragmentation of supply chains. For example a third of world trade happens within firms while two thirds of European imports are not of final products but of intermediate goods and raw materials, to which EU firms add one or more layers of value before they are finally sold, often for export.  The EU trade commissioner gave the example of a Nokia smartphone, "it is listed as being made in China, but in reality 54% of its value comes from tasks that are carried out in Europe. Key components are produced in other parts of Asia and only the assembly itself actually happens in China.  Today, we measure trade by counting the total price of the good that is being exported or imported, but because we do this both for components and for final products we get a distorted picture of what is really happening.  Hence according to the database, when we look at trade in value as opposed to traditional statistics, EU trade deficit with China is reduced by 36%. In 2011, the trade deficit between the EU and China stood at EUR155.9 billion however using this new method China-EU deficit starts to look like less of a problem."

On services, interestingly when looking at trade in supply chain terms,  the classic distinction in trade policy between goods and services is increasingly artificial. This is because services represents almost 60% of the value European firms add to the products exported from Europe. 

The database covers 27 EU countries and 13 other major countries in the world for the period from 1995 to 2009. It is notable that not a single African country is included in the database which possibly says something about Africa's non-participation or rather minuscule contribution to global supply chains. In addition, all BRICS economies are included in the database with the notable exception of South Africa.  One wonders why the EU wants African countries to eliminate export taxes (under the EPAs) when in essence the contribution of African exports to global trade and supply chains is too insignificant to be in included in the database.

African countries generally export largely raw materials (e.g fuels, metals) and some agricultural products to the EU and generally lack capacity to add value domestically especially for manufactured products. Other supply capacity barriers to Africa's participation in global value chains include limited foreign ownership and lack of global networks which are a significant factor in characterizing the intensity of global exports but not necessarily for regional exports. The lack of technological advancement is also a significant barrier especially in global exports. Public infrastructure constraints, such as inferior power services and customs delays, seem to have more immediate impacts on regional exports as does customs efficiency and poor trade facilitation which is also hampers the competitive participation of African producers in global supply chain industries. 

In a related article, we saw that China overcame similar challenges by exploiting joint ventures.  China allowed foreign firms access to the domestic market in exchange for technology transfer through joint production or joint ventures. In fact, 100% foreign owned firms were a rarity among the leading players in the industry in China, unlike Export Processing Zones in Africa. China’s openness to foreign investment and its willingness to create Special Economic Zones (SEZs) where foreign producers could operate with good infrastructure and with minimum hassles must therefore receive considerable credit. However if China  welcomed foreign companies, she always did so with the objective of fostering domestic capabilities.

Bileateral Investment Treaties (BITs) Coming Back To Bite

Published by TIA

See related blog post on ICSID. 

African governments once rushed into signing Bilateral Investment Treaties (BITs) to encourage FDI. Lawyers are however now calling for new models.

With much of Africa’s investment coming from abroad, how governments manage complaints from foreign companies is a vital determinant of the business environment. For decades, foreign investors depended on diplomatic protection from home governments in their overseas adventures, which occasionally gave rise to “gunboat diplomacy”. The US, for example, sent troops into Latin America 34 times to settle commercial disputes.

Since the 1960s, and spiking in the 1990s, a more formal investment approach was attempted in the form of bilateral investment treaties (BITs). These state-to-state agreements establish how governments handle investors from each other’s country, covering fair and equitable treatment, security, and compensation for expropriation, in assets but also, in some cases, in shares, stocks, bonds and other modalities. While BITs infringe sovereignty, in that disputes are settled in international tribunals and not domestic courts, many developing countries saw them as a way of signalling their attractiveness for foreign investment.

The number of treaties has grown exponentially, to around 2,500 today. The number of claims is growing too. Philip Morris, Total, Mobil, Shell, Siemens and Cargill have all taken states to arbitration, with Sri Lanka suffering the first award against a developing country in 1990. Twenty-six percent of new claims in 2010 had an African or Middle Eastern state party involved. In Africa, Zimbabwe, Tanzania, Namibia, Liberia, Algeria and Senegal have all faced actions. There are likely to be more disputes in areas such as mining, water and agriculture, according to Mahnaz Malik, an investment arbitration lawyer at the Chambers of Arthur Marriott QC at 12 Gray’s Inn Square. She warns that events such as the Arab Spring can generate a flood of claims.

But so far, South Africa is arguably the most prominent in the African context. Pretoria signed 30 BITs post-1994 to attract private investment. The new government had inherited a society that was among the most unequal in the world, where the vast majority of black South Africans had been excluded from meaningful economic activity under apartheid. As part of a set of initiatives to redress this inheritance and to meet the government’s constitutional obligation to create a more open and equitable society based on human rights, Black Economic Empowerment (BEE) programmes were initiated.

In 2007, a group of investors from Italy and Luxembourg filed a claim at the Convention of the International Centre for Settlement of Investment Disputes (ICSID), arguing that South Africa’s 2002 Minerals and Petroleum Resources Development Act (MPRDA) contained provisions that amounted to expropriation of their mineral rights, thus violating the BITs South Africa had signed with both countries. The MPRDA, a separate piece of legislation from BEE that aims to transform the minerals industry in South Africa, requires that holders of mineral rights undertake equity or equity-equivalent obligations; requirements emerging from consultations between the government and relevant parties, including representatives of the claimants. The South African government defended the MPRDA by arguing that it protected existing mineral rights and allowed for their uninterrupted use so long as companies also met the government’s wider transformational obligations in some accepted combination. In a punitive judgment, the Icsid tribunal dismissed the claimant’s case, ordered them to pay the legal costs of the South African government, and prevented claimants from bringing any such action again in future.

On the basis of similar reviews conducted internationally, notably, in the US, Norway, and certain Latin American states, South Africa launched a lengthy BIT review, the conclusion of which is that the country will not enter any new treaties unless there are “compelling economic reasons”, says Xavier Carim, deputy director general of the international trade and economic development division of South Africa’s Department of Trade and Industry. “The very fact that narrow, shortsighted commercial interests can subject progressive and laudable government policies to international arbitration, the outcomes of which are unpredictable, creates unacceptable risks that can have a chilling impact on legitimate public policy making,” he says, noting that there have been inconsistencies in the rulings taken by tribunals over similar cases.

It would be simplistic to characterise BITs as simply giving rise to clashes between progressive government policy and corporate interests. In some cases, such as a SOABI v. Senegal dispute, the problem was a largely technical disagreement over terms and conditions of a low cost housing programme.

In Zimbabwe, cases have been brought in objection to the ruling Zanu-PF party’s arbitrary and at times violent land reform programme. Broad and ambiguous terms have been a central problem of many agreements, says Jansen Calamita, senior research fellow in international trade and investment law at the British Institute of Comparative and International Law. “BITs are an agreement by the host state to accept the application of external standards to determine the legality of its actions – standards above and beyond the state’s constitution and national law. If the standards agreed are not clear – as they largely are not – it will be left to tribunals to give meaning and effect to those standards.”

Some lawyers believe the first wave of BITs were signed too fast, with text penned by a closely-knit group of Western lawyers. The majority of BITs reflect the texts developed to promote the 1960s anti-communist, post-decolonisation protection agenda for European investors, says Ms Malik. She believes capacity to understand complex investment law issues is not always present in developing country negotiators. She notes that the imbalance becomes more acute as negotiations are often based on the developed country’s model. In a speech at the London School of Economics, Randall Williams of the South African Trade Department claimed to have seen negotiators making agreements without the presence of a lawyer.

Latin American governments have come out strongly in opposition to prevailing norms. In 2009, Ecuador’s vice minister of foreign affairs, Lautaro Pozo, said BITs reflected a “fifty year old ideology” and that many countries signed them without sufficient understanding of their implications. BITs did not, in his reckoning, reflect the objectives of developing states, especially on issues of the environment and human rights.

In one case, Philip Morris tried to sue Uruguay for copyright infringement when it ruled that cigarette packets needed to carry health warnings. Bolivian President Evo Morales claims that international arbitration offends state sovereignty, with Bolivia, Ecuador and most recently Venezuela denouncing Icsid, the Washington-based arbitration body, part of the World Bank Group, which settles nearly half of claims. India and Mexico have both refused to be party to the Icsid Convention, and Brazil has not ratified any BITs.

Others are more upbeat. “I think the backlash against investment treaties is overstated,” says Anthony Sinclair, a partner at law firm Allen & Overy. “Countries continue to sign these treaties at a rate of about 50 a year.” Mr Sinclair acknowledges there is “fine-tuning and recalibrating” of text, especially in terms of public interest regulation. “At the same time, countries are in search of growth, for which foreign investment is key.”

There is no credible analysis proving the effect of BITs on investment, which would be very hard to quantify. Furthermore, BITs are not the sole determinant of investment. China is a prolific signatory, but continues to invest in countries without BITs – in contrast to Germany, where risk insurance is only issued to companies if they are operating in a country with a German treaty. Yet whenever governments and investors are discussing major cross-border investment, “everybody” on both sides is talking about investment treaties, Mr Sinclair claims.

The focus on treaties should not draw attention away from domestic reforms which could lessen the investment risk. Guinea-Bissau has undertaken domestic reform, turning a single court system dealing with everything from divorces to commercial disputes, into a more differentiated structure with commercial courts run by appropriately trained legal teams and judges, says Raimundo Pereira, speaker of the Parliament of Guinea-Bissau. Nonetheless, bilateral frameworks do appear to be of growing importance to investors.

Despite the frustrations, there is little that can be done about existing treaties until they expire, at which point clearer text can be negotiated, or countries can withdraw. Pulling out of active treaties altogether is unlikely. Even South Africa has not done so, given the diplomatic downsides. The goal of African legal teams is to improve the text in future agreements.

To date, many African governments employed international law firms to advise on treaties. While this helps buffet their expertise in negotiations, capacity-building of African government lawyers is needed. Rukia Baruti recently founded the African International Legal Awareness (AILA) programme, which in late 2011 organised a week long BIT training workshop. Participants included lawyers from Liberia, Ghana, Uganda, the Gambia, Egypt and South Africa. Baruti organised the workshop, held in London, after attending an investment conference in Mauritius, where many African attendees were unfamiliar with investment treaty arbitration.

“By building capacity and increasing awareness of the consequences of concluding investment treaties, African states will, before signing such treaties, carefully examine the meaning and consider the provisions. This would go a long way to avoiding disputes involving African states.”  Mr Sinclair speaks approvingly of AILA, in which his firm participated. “There is no shortage of good will on the part of international lawyers to contribute on a pro bono basis. The issue is whether there are enough people with sufficient inspiration and energy, like Rukia, to organise these activities. Otherwise busy lawyers in firms or chambers, or in academic careers, may not be able to produce something like this themselves.”

Aila has since been approached by African governments to deliver training in-country. Similarly, the International Institute for Sustainable Development has conducted training courses for African government officials in country and at a regional level.  It is important to note that while bilateral treaties have been overwhelmingly North-South in the past, that is changing in reflection of growing South-South economic interaction. Current BITs between developing countries include Mozambique-Indonesia, Djibouti-China and Eritrea-Uganda. South-South deals provide a platform to create more development-orientated texts, but often the European template is copied over. Regional treaties on the other hand tend to create more bespoke texts.

“I have found that debate is healthier in regional dynamics compared to a bilateral context,” says Ms Malik. A recent COMESA Agreement treaty contains more nuanced obligations than those found typically in bilateral treaties, she claims, including provisions to allow tribunals to take greater account of the development status of the host state. The COMESA treaty also omitted the full protection and security standard, a controversial feature in many BITs which puts hefty responsibilities on states. Algeria was taken to tribunal to pay damages related to civil unrest during the civil war. Similarly, Congo faced a claim for riots on the streets of Kinshasa.

The COMESA treaty, and new model texts, exhibit the potential for designing modern templates, says Ms Malik. “It shows African countries that they are not tied to the old European model. It paves the way for innovation in terms of making the treaties better balanced.”

Published by TIA : 05 March, 2012

Solar Lighting Boom in Africa?

Nairobi — As many as 120 million households in Africa will be living off-grid by 2015, creating one of the world's largest markets for portable solar lighting in the next five years. This is according to a report, 'Solar Lighting for the Base of the Pyramid - Overview of an Emerging Market' which is published by Lighting Africa, a joint International Finance Corporation (IFC) and the World Bank initiative that is developing continent-wide programmes for solar lighting.

The report projects an up to 65 per cent growth rate in sales of portable solar lights, comparable to the recent explosion in mobile phone sales on the continent. Currently, only 0.5 per cent of some 140 million African people living without regular or reliable access to electricity have such lights.  The growth will be fueled by entrepreneurs using the latest technologies and designing products to suit consumers' tastes, the report says. But the market could grow even faster if distribution and financing were scaled up, it says.

Arthur Itotia, Lighting Africa programme manager, told SciDev.Net that the initiative does not just aim to light households but also to save people money and reduce the health risks associated with fuel lamps.  "By converting from kerosene to clean energy millions of consumers can improve their health, reduce their spending on expensive fuels and, ultimately, benefit from better illumination and more productive time in their homes, schools and businesses."  

The report also found that an average African household could spend US$225 less a year on kerosene by using solar lighting. Lighting Africa is helping to build the market for off-grid lighting across Sub-Saharan Africa by investing in consumer education, improving access to financing and looking at new ways to distribute the lighting.

Dana Rysankova, senior energy specialist in the Africa Energy Unit at the World Bank, said that Africa's high population growth and low levels of access to the grid mean that it will soon surpass Asia in the number of people without electricity.  The lessons learned from Africa, she said, are being used to give advice to other areas.  "For example, Lighting Africa advised another World Bank project in Haiti that was disseminating solar lanterns after the devastating earthquake there," said Rysankova.

But other experts warn that such noble ideas risk being overridden by market forces - especially if left solely in the hands of private sector players.  "Much as the idea is great and tenable, the implementers need to shape the market to allow poor households to buy the lights," said Simon Mugambi, an independent energy market consultant.

Dan Okoth All Africa 22nd December

Why Export Bans Fail to Spur Local Value Addition

Exports of raw cashews nuts by Kenyan farmers were banned last year in a bid to revive the local cashew nut industry. The ban provided that only Government and the National Cereals and Produce Board would be authorized to buy raw nuts from farmers. The purpose of the ban was to attract investors to set up cashew nut processing units in the country, however, the low volumes of nuts produced meant that a year later, no factory of viable capacity has been established.

There could have been some implementation weaknesses. The national task force that recommended the ban, also proposed that the National Cereals and Produce Board (NCBP) should become the buyer of last resort and market regulator, as is the case with maize and wheat. However since  no funds were channeled to NCPB for the task, this gave middlemen a field day as they bought the nuts at about a third of the price prevailing before the ban. As a result, farmers are now bracing themselves for substantial losses following cashew nut harvests and government delays in providing alternative marketing channels. 

If I may think out loud- I wonder if the authorities made specific efforts to increase production of local cashew nuts, identify investors, provide incentives and jointly venture with them, to help establish cashew processing plants in the country. 

See recent article here.

Nationalisation of SA's Mining Sector Ruled out

All Africa 24th September 2010

South Africa is among the world's largest producers of gold, platinum and chromium, having reaped thirty-two billion euros in 2008 alone from its mining industry.

South African president Jacob Zuma ruled out the nationalisation of the country's mining sector as he closed a tense congress of the ruling party in Durban.

The week-long ANC National General Council was marked by fiery speeches and calls by the the party's left for the state take-over of the the economy's largest export sector.

Nevertheless, Zuma assured the 3,000 delegates that the ANC regards South Africa's minerals and petroleum as strategic national assets over which the state would retain custodianship.

Need for Capacity for Value Addition in Natural Resources

We need to build capacity in Africa in order to add value to natural resources. 

In a recent post, we discussed a proposal from African countries to ban exports of natural resources. Tanzania reportedly has in place a ban on the export of raw gemstones. However, in a recent news piece, the Tanzania Government Ministry of Minerals and Energy has proposed to lift the ban on exports of gem stones with a weight of over one gram, due to lack of local capacity to cut stones, stating "as there is no point of people staying with uncut stones while there is no capacity."

The Ministry's Commissioner for Minerals, Dr Peter Kafumu, also stated that the government move was propelled by the fact that the lapidary is still at infant stage and exporters need additional time. He also added "In actual fact we were not ready when we imposed the ban. I think politicians pushed us a bit harder."

It is interesting to note that investors such as TanzaniteOne are pushing for exemption from the export ban while the labour market opposes lifting of the ban, which could reduce employment opportunities locally. What is Government to do?

Discouraging Exports of Raw Materials

Delegates at a recent meeting proposed that Africa should ban or discourage exports of raw materials to developed countries. Instead these resources should be developed and added value locally. The AU commission may be requesting Presidents to put their political weight behind such a proposal ahead of the 3rd Africa-Europe Summit in November in Libya.

Indeed such an approach would put local content and value addition policy at the heart of Africa's development plans. Local content is where foreign companies are obliged to procure a percentage of labour, goods and services from the host country. Norway pioneered it. See related post on the Norwegian case study. Brazil, a rising oil giant, is using it.

Two questions to ask are: how many African countries currently have the regulatory, investment and governance environment necessary to efficiently manage and add value to natural resources?  Additionally are there legal agreements- regional or bilateral including other barriers that would prohibit such an approach at a national level?

The WTO dimension.

Tariff escalation in developed countries e.g. in fuels, forestry and mining sectors would continue to be a concern. Non tariff barriers e.g. technical regulations, import licensing and prohibitions in value added products would also be prohibitive.

WTO rules (e.g. GATT Articles I, III, XI, XIII) would ordinarily not permit a WTO Member to undertake a legal measure to ban or discourage exports, even for reasons of poverty. It may be possible to use export taxes especially where natural resources dominate an economy. However there are proposals and/or disputes in the WTO and EPAs seeking to phase them out. There could also be possibilities for developmental flexibility for the economic development of LDCs. GATT Article XI:2 also provides an exception to the ban of export restrictions to prevent critical shortages. In addition, general exceptional measures found in GATT Article XX, could be relevant. These include measures:

XX (g) for the conservation of exhaustible natural resources. However measures taken pursuant to this provision, would need to be implemented in conjunction with restrictions on domestic production or consumption. This is therefore a two part legal requirement- a need to show conservation of exhaustible resources such as fossil fuels and metallic ores and restrictions on domestic production. However even renewable resources can be exhausted if over-traded or mismanaged hence export restrictions may be necessary.

XX (i) involving restrictions of exports of domestic materials necessary to ensure essential quantities of such materials to a domestic processing plant during periods when the domestic price of such materials is held below world price as part of a government stabilisation programme. This is a periodic measure applicable specifically to export restrictions undertaken to ensure sufficient quantities for domestic processing, specifically when domestic price is below world price and as part of an internal price stabilisation scheme. Given the extreme price volatility of certain natural resources, this provision maybe relevant however the precise requirements require dual pricing mechanisms. 

XX (j) essential to the acquisition of products in general or local short supply. However such measures must be consistent with the principle that all members are entitled to an equitable share of the international supply of such products.

**********

Daily Monitor Uganda

Participants at a meeting of the African Union’s Trade and Industry Commission yesterday proposed that the continent adopts policies to discourage the export of raw materials to the developed world.

During a media briefing at Munyonyo, Kampala, Ms Elizabeth Tankeu, the Trade and Industry Commissioner, said: “We have been exporting our raw materials to Europe since the colonial times when the Europeans came to Africa. They still come here for our resources but we have remained the poorest continent”.

“The European Union through its Economic Partnership Agreements wants Africa to trade with them at zero per cent tariffs. They say they want reciprocal trade. But we are saying Africa still needs a lot in place for reciprocation to begin. We’re telling them we are not going to continue exporting raw materials.”

More here.

Trade in Natural Resources: A look at Norway

The WTO World Trade 2010 Report on Trade in Natural Resources illustrates that Russia, Saudi Arabia, Canada, United States and Norway are the top five global exporters of natural resources, with Algeria and Nigeria (ranked globally at 13th and 15th respectively) included in the top 15 in the world (data includes intra EU trade).

This is a focus on Norway, an EFTA Member but not part of the European Community EC.  Norway is the fifth highest exporter of natural resources globally and a European country whose exports display some similarities with Africa’s overall export profile. Like many African economies, Norway is particularly rich in commodities and energy resources (oil, natural gas and water for hydro power production).  Commodities include fish, timber, and some minerals, including thorium as a potential resource base for new technologies of nuclear power generation. Norway however has not suffered many of the curses that plague some resource-rich countries, such as corruption, inequitable benefit sharing, capital flight or the “Dutch disease”. Norway has consistently been ranked by the UN Human Development Index as the best country in the world to live in, and the World Economic Forum has ranked Norway as one of the top 15 most competitive countries globally. The small size of the country (population 4.8 million), its geographic location on the outskirts of Europe, makes its development trajectory which is based on sustainable natural resource management, an interesting case study for Africa.

While industrial products typically make up 85 per cent of OECD countries’ total merchandise exports, the OECD figure for Norway is around 28 per cent. Norway’s reputation as raw materials supplier however, should be understood in light of the fact that major segments of its raw materials industry are highly knowledge- and technology-intensive, even though the end products are not considered to be processed industrial goods. A good example is the petroleum industry, in which technology and know-how have in themselves become an increasingly important business sector. In fact, the increase in oil and gas revenues has resulted in a reduction in the share of export revenues attributable to services, from around 28 per cent in 1991 to around 24 per cent in 2004. While services typically account for a growing share of world trade, the opposite trend in Norway is due to the fact that its petroleum exports are growing even more strongly than its services exports.

Norway’s direction of trade is unlike that of most African countries. For geographical and historical reasons Norwegian trade largely takes place with its European neighbors while African countries trade primarily with other continents. Crude petroleum and natural gas remain Norway's most important export products which together account for about 56.8% of the exports, 25.8% of Norway's GDP and 65.1% of the total value of merchandise exports (however Norway is not an OPEC Member). Within the food sector, Norway is the tenth biggest fishing nation in the world in terms of quantity produced, and the world's second largest exporter of seafood in terms of value. Forests cover 38% of Norway's land area, and are mainly privately owned (88%) and export financing in the forestry sector is subject to local content requirements. In addition, Norway is the largest producer of hydropower in Europe; about 96% of electricity generation in Norway is hydroelectric. 

The manufacturing sector is relatively small and is concentrated on industries associated with the production of equipment used in the extraction and processing of natural resources such as aluminium, machinery and transport equipment, followed by chemicals.  However 80% of Norway's imports are manufactured goods.

The Norwegian economy is generally characterized as a mixed economy - a capitalist market economy with a clear component of state influence.  For example, revenues from Norwegian oil and gas activity are invested in the Government Pension Fund, ensuring that the country’s petroleum wealth will benefit future generations. The fund serves as a resource as it makes long-term investments in solid companies throughout the world, with ethical considerations as cornerstones in the fund’s investment strategy. The “oil fund”, as it is known to the general public, is often cited by the IMF as an exemplary sovereign wealth fund which has an average ownership stake of one per cent in the global stock markets, thus securing its right to a considerable share of future profits in listed companies throughout the world. 

What seems to make the difference is the participation of the Norwegian State and her effective management of natural resources in the economy. For instance it is estimated that in 2008, the State owned around one-third of the Oslo Stock Exchange capitalisation and is a major shareholder in several of the larger commercial listed companies.  The State’s ownership contributes to safeguarding the public interest in Norway’s natural resources and the revenues flowing there from.  For instance, the Petroleum Act establishes that the property rights over Norway's petroleum and gas resources are vested in the State. In the same vein, revenue management and taxation in this sector are directly linked to the States responsibility to its citizens which historically is proven to be an important driving force to strengthen accountability- because of the social fiscal contract created between citizens and the government.

Along these lines, we should recall a previous post which highlighted the importance of local content as a basis for sustainable development in Africa. This is relevant since natural resource exports as a share of Africa’s total merchandise exports, are second highest globally at 73%, after the Middle East which holds the highest concentration at 74%. This is according to the WTO Report on Trade in Natural Resources, which also reveals that export taxes on natural resources appear twice as often as export taxes in other sectors. Hence it appears that there is a global fiscal practice where the State intervenes to provide for effective natural resource management, sustainable development and the advancement of comparative advantage in an economy. Despite this, WTO and EPA negotiations continue to push for the elimination of export taxes in Africa’s resource based sectors.  Export taxes could be used to fund research, technology and innovation in resource sectors just like Norway does in the fish and seafood sector. Exporters of fish and fish products have been subject to a levy that varies between 0.2% and 1.05% of the export value depending on the species and the stage of processing.  The levy is used to finance the activities of the Norwegian Seafood Export Council (NSEC) and the Fishery and Aquaculture Industry Research Fund.  The elimination of export restrictions for the sole benefit of importers can also be detrimental to the environment and the development of African resource economies.