To develop downstream capacity, African governments must address challenges in power generation and provide more policy stability and insurance against disruptions from armed conflict. Though considerable, these challenges can be overcome. They should be met in ways that ensure sustainable access to power over the long term and a viable social license to operate in affected communities.
• Embrace hydropower potential—which is vast in these countries—but pay attention to social costs. The high costs of developing hydropower have slowed its expansion. Unless situated in extremely remote areas, hydro projects displace entire communities and impose localized economic costs in the form of reduced economic activity, “greenness,” and ecosystem function in the Global South (Fan et al. 2022). To ensure that these projects are not simply foisted on the most marginalized people, countries should conduct comprehensive environmental impact and social impact assessments and use the results to develop compensation schemes for disproportionately affected communities (Moran et al. 2018, Markkanen and Anger-Kraavi 2019). Investors should require independent auditing of government relocation, resettlement, and compensation processes to help ensure fairness and forestall popular discontent. Doing so would help build and sustain lasting social license to operate.
• Exempt refinery-related capital goods and industrial inputs from tariffs. Developing countries often rely on trade taxes, such as import and export duties, as key sources of government revenue. For capacity-constrained governments, trade taxes are attractive because ports provide a convenient tax handle that makes evasion difficult. The marginal benefits of imposing import duties on industrial inputs must be weighed against both the benefits of developing downstream capacity and the effects such taxes may have on siting decisions by multinational corporations. Exempting refinery- and associated infrastructure-specific capital goods and industrial inputs from taxation should reduce barriers to investing in in-country downstream capacity.
• Locate downstream capacity in areas of greater domestic stability. Many armed conflicts in Africa, including those in the DRC and Mozambique, are highly localized. Pockets of opportunity—areas and populations in conflictaffected and fragile states that benefit from better access to infrastructure and greater stability—often exist (Hendrix and Anderson 2021). These pockets are usually located near areas of significant government presence near major cities, ports, and transportation hubs. Slurry pipelines can be used to transport mined ore long distances (sometimes hundreds of kilometers) from fragile locations for processing in stabler areas. Doing so reduces the costs and vulnerabilities associated with overland trucking or rail transport in fragile contexts. Pipelines are no panacea, as they can be sabotaged, but they do reduce exposure of mine and refinery staff to the dangers of operating in insecure environments.
• Leverage external policy anchors to provide policy stability and transparency. External policy anchors are commitments to external actors— foreign governments, intergovernmental organizations, or civil society organizations—that help “lock in” policy reforms by enhancing international scrutiny of domestic practices and increase the costs of reneging/failing to act according to agreed-upon standards. When domestic checks on corruption and property rights protections are weak, external policy anchors can serve as partial substitutes. One such anchor is the bilateral investment treaty (BIT), which establishes the terms for private investment by foreign nationals and companies. BITs include provisions for channeling disputes through international arbitration rather than the host state’s legal system. They are particularly relevant for investment in extractives and linked industries, because the underlying assets are immobile, eliminating or massively increasing the costs of using capital flight as a mechanism to keep host governments honest. The four countries have a patchwork of BITs with the economies that are home to most of the world’s largest extractive firms (table 2). All four have signed BITs with China, although the DRC and Guinea have failed to ratify theirs. The United States has BITs with the DRC and Mozambique. Guinea is the only one of the four countries to have a BIT with Canada, and only Mozambique has a BIT with the United Kingdom. None of the countries has a BIT with Australia. To court downstream investment, African governments should prioritize establishing BITs with a wider array of Western partners. The four countries are active participants in regional economic blocs, including the Economic Community of West African States (ECOWAS [Guinea]), the East African Community (the DRC), and the South African Development Community (Madagascar, Mozambique; since 2019, Guinea has been subject to ECOWAS’s Common Investment Code). However, Guinea is also under ECOWAS sanctions stemming from the military coup.
Not all external anchors are intergovernmental in nature. All four countries participate in the Extractives Industries Transparency Initiative (EITI), which affects investor confidence indirectly by establishing double-entry accounting mechanisms and convening multistakeholder certification and reporting mechanisms intended to combat corruption. Both the DRC and Guinea are categorized as “high” in terms of their compliance status, although the coup in Guinea has cast doubt on its designation.16 Madagascar and Mozambique are categorized as having made “meaningful progress” in complying with EITI’s transparency standards. Achieving high compliance should be a top priority.
Building the sustainable energy systems of the future will require much larger, more resilient supply chains for the critical minerals that underpin green technology. African economies will be key actors in this process as producers of raw materials. Whether they can move up the value chain by developing more local mineral processing capacity will depend on how successful they are in tapping their vast hydropower resources, being mindful of the costs imposed on local communities, and addressing or mitigating governance challenges that act as barriers to investment.