Developing local industries connected to the gas value chain: What can Tanzania learn from Malaysia?

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Joining with our World Bank Group teams in the field in Kenya, Rwanda and Tanzania, I was pleased to recently see first-hand evidence of the strong impact that our Global Practice on Trade and Competitiveness is having on economic development throughout East Africa. Our projects are currently helping our clients improve their business environment, increase the competitiveness of firms in key sectors, and develop trade flows.

In Tanzania, I joined a fascinating conversation on local industry development connected to the natural gas value chain. Tanzania has started exploring what could be extremely large reserves of natural gas (estimated at 50.5 trillion cubic feet), and the country is working with three major oil and gas companies on the construction of an LNG plant. Overall FDI is estimated in the range of $20 billion to $30 billion over the next 20 years. Tanzanian firms are rightly asking: “How much of that investment can accrue to us? How can we take part in our region’s growth?”

The World Bank Group’s team, led by Andrea Dall’Olio, who is based in Dar es Salaam, has put together an innovative knowledge program to identify upstream, midstream and downstream linkages for local firms. In addition to a comprehensive, bottom-up industry analysis – which has identified the 15 industry clusters which could benefit most from developing linkages with the gas industry, and in particular the construction of the LNG plant – the program is supporting a series of workshops to raise awareness of policies related to local industry development.
 
Two workshops were hosted on the experiences of Trinidad and Tobago and of Ghana. The third workshop – held by Kelvin Tan of the Malaysian Performance Management and Delivery Unit (PEMANDU) – coincided with my visit to the region. Kelvin gave a very inspiring talk on how Malaysia developed a vibrant local industry and supply chain in oil and gas as well as in key related services.
 
The sobering fact: It took 40 years of dedicated policy and concentrated effort for Malaysia to reach this point. The happy fact: Countries like Tanzania can learn from Malaysia’s experience and draw practical applications, while customizing them to fit the local circumstances. I learned that Nigeria tried to adopt many of the elements of the Malaysian model, but with mixed success because they were not sufficiently adjusted to Nigeria’s institutional capabilities.

These were some of the key lessons that resonated well with the Tanzanian audience of policymakers and investors:
  • When capital is a constraint, choose a local industry development model that favors the enhancement of capabilities among individuals. Hire and train petroleum engineers, welders, electricians . . . and then encourage them to set up their own firms. Proeight Malaysia – now a very successful design engineering firm – was started by engineers who gained experience in international oil and gas firms (IOCs) before venturing out on their own (http://www.proeight.com.my/).
  • Accept the fact that products and services offered by local industry may be more expensive, at least initially. Local-content policies need to take the cost and availability of services into account when mandating local-content requirements.
  • Manage expectations. Current estimates that local industry in Tanzania could benefit up to 15 percent from the $20 billion in investment are probably inflated. In South Africa, this figure was much lower, at about 1 percent. It’s important to get these figures right to manage expectations, calibrate efforts and drive communication. Tanzania’s private sector – firms both large and small – as well as local communities would be very disappointed if the spillover effects are much less than announced. This could lead to troublesome social tensions.
  •  Plan early. Develop skills and capabilities of individuals and firms; work with the financial sector on the availability of credit to local firms to strengthen their business capacity; put in place the enabling infrastructure and develop local institutional capacity. Don’t wait until the IOCs have started building, or it will be too late!
My own takeaway was: Developing local industry connected to the gas value chain or other types of large investments is a challenging undertaking, with high expectations from countries that stand to benefit. The World Bank Group has been strengthening its expertise and advice in this field, and we are eager to help our clients with even more hands-on efforts as we apply the lessons learned in this field, across the world.

Authors

Cecile Fruman

Director, Regional Integration and Engagement, South Asia

Join the Conversation

Lemayon Melyoki
October 02, 2014

Thank you Cecile for useful tips. The points you have raised are spot-on target. I like the last point because it actually has prospects to address the preceding points. We are actively discussing initiatives for developing skills and capabilities of individual firms at the University of Dar es Salaam Entrepreneurship Centre(UDEC)and would welcome your support toward these efforts. Thanks.