The Localization Paradox: Privatization with Pragmatism
FEATURED BLOG
The Localization Paradox: Privatization with Pragmatism
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By David Sturmes-Verbeek and Martin Nkonge
Oct, 2024
For decades, Africa's economic development has been hampered by a traditional approach that prioritizes foreign investment and exports of raw materials. This has led to the "resource curse", where an abundance of natural resources has not translated into meaningful economic gains. It is ironic how a continent with vast energy resources exports 75% of its crude oil, only to re-import the refined products at a premium. Meanwhile, approximately 53% of the continent's population lack access to electricity. This misprioritization of resources is estimated to cost the continent around $50 billion annually.
However, a shift is underway, with a reinvigorated commitment to localize the processing of critical minerals to generate more economic value domestically. There is no denying that the push for self-sufficiency has exciting prospects, but it remains constrained by the very technological and human capital deficiencies it aims to remedy.
Thus, African nations face a paradox: while they strive to add value through local processing, their reliance on foreign technology and expertise continues to undermine their bid for self-sufficiency. According to the United Nations Conference on Trade and Development (UNCTAD), Africa's mineral sector is plagued with a lack of necessary technology, which hinders the continent's ability to fully explore and benefit from its rich mineral reserves. As Africa continues to depend on external partners for exploration, extraction, and processing, African governments must adopt a strategic partnership model that balances foreign investment with domestic capacity building.
Localization Efforts
Recent localization efforts are being driven by a growing recognition of the significant value gap between exporting raw materials and processing them locally. As an example, raw bauxite fetches approximately $65 per ton, while processed aluminum commands up to $2,335 per ton.
Zimbabwe banned raw lithium exports in 2022 to encourage domestic processing. Meanwhile, the Africa Finance Corporation has agreed to provide Zambia with $100 million in financing for a cobalt sulfate refinery by 2025 to support their own localization efforts. Additionally, Zambia and the DRC are planning to establish a special economic zone for battery production, which could make the DRC one of the world's largest battery producers by 2030 or 2040.
The private sector is also contributing toward this trend, from startups to conglomerates. For example, the Nigerian startup Sabi, which focuses on sourcing, distribution, and digital infrastructure, is currently signing deals to supply lithium to local processing plants, aiming to export the refined minerals to global markets, such as the United States and Europe.
On the other end of the spectrum is Aliko Dangote's oil refinery in Nigeria. With a capacity to produce 650,000 barrels of oil per day, the refinery is poised to make Nigeria self-sufficient in fuel production. This project demonstrates the potential for private sector investment in localization and the importance of policies that encourage domestic processing.
The Delicate Balance of Localization
As Africa makes strides in localizing mineral processing, the continent is poised for a transformative shift in the mining space. However, continued reliance on foreign companies for expertise and infrastructure will likely hinder this effort. China, for instance, dominates Africa’s critical minerals sector, controlling 72% of cobalt and copper mines in the DRC alone. Chinese companies have also set up mineral processing plants in other countries, including Zimbabwe and Ghana. Beyond China, the EU and US have invested in the Lobito Corridor, a 1,300km railway line in Angola that connects the Atlantic Ocean to the borders of the DRC and Zambia. The corridor aims to facilitate the transportation of critical raw materials, strategic minerals, and electric vehicle (EV) battery components from the DRC and Zambia to the EU and US.
While Foreign Direct Investment (FDI) is an important component of the continent’s overall capital base, it needs to be appropriately circumscribed. Specifically, African nations need to adopt a pragmatic approach that balances the need for foreign investment with the imperative of ensuring that the benefits of resource extraction are shared equitably with local communities and economies. Hence, African countries must develop strategies to collaborate with foreign companies on equal terms to bridge the localization gap. This can be achieved through joint ventures and technology transfer agreements, ensuring that African nations benefit from both the expertise and profits generated from processing critical minerals. Implementing local content policies, which require foreign firms to employ local workers and use local goods and services, can also help build domestic capacity and foster economic growth.
Meanwhile, to empower local private sector actors - especially small and medium enterprises - to successfully participate across the mineral processing value chain - including potentially as suppliers to larger foreign entities, governments can offer targeted support to domestic startups and incubators. This can include tax breaks, subsidies, and other benefits that help smaller local businesses overcome initial barriers to entry. Further, the need to upskill local experts is crucial in reducing reliance on expatriates for technological innovation. Notably, the Lubumbashi Centre of Excellence for Advanced Battery Research serves as a prime example of ensuring the right brain pool is in place to drive innovation and expertise in the region. This way, African governments can create a thriving ecosystem of local companies that are capable of both supporting and competing with foreign companies.
In summation, Africa’s localization journey in the critical minerals sector stands as a defining moment in the continent's economic trajectory. By embracing a balanced strategy that combines strategic foreign partnerships with robust support for local industry, African nations can overcome the localization paradox and shift from dependence to empowerment. Targeted investments in technology transfer, skills development, and support for local enterprises are essential for unlocking the full value of Africa’s resources. Through these efforts, Africa can transform its resource wealth into a foundation for self-sufficiency and global influence.
David Sturmes-Verbeek is the Co-Founder & Director of Partnerships & Innovation at The Impact Facility, leading efforts to professionalize the artisanal and small-scale gold and cobalt mining sector in East and Central Africa. Martin Nkonge is an Analyst at Botho.