Columbia FDI Perspectives

Perspectives on topical foreign direct investment issues by

the Vale Columbia Center on Sustainable International Investment

No. 104   September 16, 2013

Editor-in-Chief: Karl P. Sauvant ([log in to unmask])

Managing Editor: Shawn Lim ([log in to unmask])


Downstream processing in developing countries:
Opportunity or mirage?
James Bond

Oil, gas and mineral production are capital-intensive activities that attract foreign direct investment (FDI) and generate taxes and royalties for host governments.[1] But they do not create as much employment or skills enhancement as manufacturing or service industries. In many lower income countries, raw or intermediate materials are often exported for processing in other parts of the globe. For example, although Africa possesses 26% of world bauxite reserves and produces 9% of world bauxite, it only produces 4% of primary aluminum. 

Leaders of resource-rich developing countries see lack of local processing as foregone opportunities for job creation, skills development and linkages to the rest of the economy. For decades they have tried to encourage reluctant foreign investors to invest in local processing capacity. But from an economic point of view, this may be a misguided strategy because processing of crude or ore into finished products does not directly add much value.

Oil, gas and mineral processing are not very profitable businesses and their contribution to GDP is small. They can at best hope to cover long run marginal costs, with significant over- and under-shooting around its trend line. For processing to be able to overcome low profitability and consistently generate a profit, it needs to be located where there is a geographic or other advantage.

In the case of oil refining, the advantage is being located close to a major petroleum product market (e.g., Rotterdam, Singapore, US Gulf Coast) which sets prices for traded products. Refineries close to markets minimize overall transport costs, because the cost of transporting crude to these refineries is significantly lower than the cost of transporting refined products from a distant refinery. Most refineries in developing countries lose money in economic terms and need to be subsidized, either directly from treasury or by manipulating refined product prices. Thus, Africa has only 1% of world refinery throughput but 3.9% of world petroleum product consumption and 10.4% of oil production.

For aluminum smelting, the advantage is not proximity to major markets but access to cheap energy, because of the high energy cost of the transformation process. Aluminum smelters generate a positive margin over long period only by accessing electricity at prices far below average world cost, generally because of extremely cheap hydroelectricity (e.g., smelters in Ghana or Cameroon) or a contract to buy energy at very low marginal cost (e.g., Mozal in Mozambique, supplied by a joint venture of the Mozambique and South African utilities at fractions of a US cent/kWh). If a smelter cannot access cheap electricity it cannot hope to break even.

Copper will depend on both transport and energy costs. Chile, located on the Pacific with high energy costs, exports copper concentrate for processing in East Asia while landlocked Zambia processes its ore locally and exports refined copper.[2]

Although downstream processing has led to disappointing outcomes in the past, it does not mean that it should always be foregone. Important success stories in countries like Botswana, Indonesia, Morocco, and South Africa show there can be a case for downstream processing if conditions are right. Three criteria must be met:

a)      A significant advantage, geographic or otherwise, other than the natural resource itself.

b)      Private sector investment and ownership to ensure effective management.

c)      Processing must be carried out competitively and subsidies must be eschewed.


Under these conditions, downstream processing makes economic sense.

Although downstream processing may not have been a successful development strategy, extractive industries create other positive spinoffs. Ecosystems of firms providing support to oil, gas and mining have emerged organically around the extractive sectors. For example, oil producers like Indonesia and Nigeria have seen the creation of internationally competitive support firms in oil logistics, maintenance and services. Chile and South Africa are providers of mining services, from geologists and mining engineers to specialized banks, now operating internationally. These clusters provide employment, create world-class skills and possess strong links into the rest of the economy. They are not capital-intensive and are models for development in resource-rich countries.

For governments, the best manner to exploit the potential of extractive industries therefore seems to be to nurture related-industry clusters. Support should include creating a business-friendly investment environment, promoting small and medium-sized enterprises, and providing targeted infrastructure (information/communications technology, ports, airports). Education can assist by providing targeted vocational training in partnership with the private sector. 

The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “James Bond, ‘Downstream processing in developing countries: Opportunity or mirage?,’ Columbia FDI Perspectives, No. 104, September 16, 2013. Reprinted with permission from the Vale Columbia Center on Sustainable International Investment (www.vcc.columbia.edu).” A copy should kindly be sent to the Vale Columbia Center at [log in to unmask]. 

* James Bond ([log in to unmask]) is a financial advisor specializing in infrastructure and extractive industries in emerging markets, Senior Advisor to the African Development Bank, and was previously Chief Operating Officer of MIGA, a member of the World Bank Group. The author is grateful to Bryan Land, Martin Lokanc, Herbert M’cleod, Gary McMahon, Perrine Toledano, and Louis Wells for their helpful peer reviews. The views expressed by the author of this Perspective do not necessarily reflect the opinions of Columbia University or its partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.

[1] This note was inspired by the Perspective: “Infrastructure for ore: Benefits and costs of a not-so-original idea” by Louis T. Wells, Harvard Business School.

[2] Ores of precious metals (gold, silver, platinum) are processed close to the mine because of the high value of the metal.

For further information, including information regarding submission to the Perspectives, please contact: Vale Columbia Center on Sustainable International Investment, Shawn Lim, [log in to unmask] or [log in to unmask].


The Vale Columbia Center on Sustainable International Investment (VCC), led by Lisa Sachs, is a joint center of Columbia Law School and the Earth Institute at Columbia University. It is the only applied research center and forum dedicated to the study, practice and discussion of sustainable international investment, through interdisciplinary research, advisory projects, multi-stakeholder dialogue, educational programs, and the development of resources and tools.


Most recent Columbia FDI Perspectives


·         No. 103, Nicolle Graugnard, “Toward a multilateral framework for investment,” September 2, 2013.

·         No. 102, Axel Berger, “The futile debate over a multilateral framework for investment,” August 26, 2013.

·         No. 101, Karl P. Sauvant and Federico Ortino, “The need for an international investment consensus-building process,” August 12, 2013.

·         No. 100, Baiju S. Vasani and Anastasiya Ugale, “Cost allocation in investment arbitration: Back toward diversification,July 29, 2013.

·         No. 99, Jonathan S. Kallmer, “The global significance of transatlantic investment rules,” July 15, 2013.

·         No. 98, Byungchae Jin et al., “Do host countries really benefit from inward foreign direct investment?,” July 1, 2013.

·         No. 97, Abdoul’ Ganiou Mijiyawa, “Myopic reliance on natural resources: How African countries can diversify inward FDI,” June 17, 2013.

·         No. 96, Louis T. Wells, “Infrastructure for ore: Benefits and costs of a not-so-original idea,” June 3, 2013.

·         No. 95, Terutomo Ozawa, “How do consumer-focused multinational enterprises affect emerging markets?,” May 20, 2013.

·         No. 94, Stephan Schill and Marc Jacob, “Common structures of investment law in an age of increasingly complex treaty-making,” May 6, 2013.

·         No. 93, Xiaofang Shen, “How the private sector is changing Chinese investment in Africa,” April 15, 2013.

·         No. 92, Vid Prislan and Ruben Zandvliet, “Labor provisions in bilateral investment treaties: Does the new US Model BIT provide a template for the future?,” April 1, 2013.

·         No. 91, Anthony O’Sullivan and Alexander Böhmer, “The Arab Awakening, act II: Time to move more boldly on investment,” March 18, 2013.


Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Vale Columbia Center on Sustainable International Investment
Columbia Law School - Earth Institute
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The Yearbook on International Investment Law and Policy 2011-2012 was released by Oxford University Press in January 2013. For details please see www.vcc.columbia.edu.
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