McKinsey Global Institute

December 2013

Reverse the curse:

Maximizing the potential of
resource-driven economies

The McKinsey Global Institute

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Copyright McKinsey & Company 2013

McKinsey Global Institute

December 2013

Reverse the curse:

Maximizing the potential of
resource-driven economies

Richard Dobbs
Jeremy Oppenheim
Adam Kendall
Fraser Thompson
Martin Bratt
Fransje van der Marel

The challenge ...

81

countries driven by resources in 2011

accounting for 26 percent of global GDP, up from
58 generating only 18 percent of world GDP in 1995

69%

of people in extreme poverty

are in resource-driven countries

80%

Almost
of countries whose economies
have historically been driven by resources have per
capita income levels below the global average, and
more than
of these are not catching up

90%

Almost
of resources investment
has historically been in upper-middle-income
and high-income countries

NOTE: We define resource-driven countries as those economies where the oil, gas, and mineral sectors play a
dominant role, using three criteria: (1) resources account for more than 20 percent of exports; (2) resources generate
more than 20 percent of fiscal revenue; or (3) resource rents are more than 10 percent of economic output.

... and the opportunity

of the worlds known

mineral and oil and gas reserves are
in nonOECD, nonOPEC countries

$17 trillion

Up to
of cumulative investment
in oil and gas, and mineral resources could be needed by
2030more than double the historical rate of investment

540 million

people in
resource-driven countries could be lifted
out of poverty by effective development
and use of reserves

$2 trillion

Opportunities to share much of the

of cumulative investment in resource infrastructure in
resource-driven countries to 2030

50%+

improvement in
resourcesector competitiveness possible
through joint government and industry action

McKinsey Global Institute

Reverse the curse: Maximizing the potential of resource-driven economies

Executive summary

The historical rate of investment in oil and gas and minerals may need to more
than double to 2030 to replace existing sources of supply that are coming to the
end of their useful lives and to meet strong demand from huge numbers of new
consumers around the world, particularly in emerging economies. If resourcedriven countries, particularly those with low average incomes, use their resources
sectors as a platform for broader economic development, this could transform
their prospects.1 We estimate that they could lift almost half the worlds poor
out of povertymore than the number that have left the ranks of the poor as the
result of Chinas rapid economic development over the past 20years.
However, many resource-driven countries have failed to convert their resource
endowments into long-term prosperity. Almost 80percent of these countries have
per capita income below the global average, and since 1995, more than half of
these countries have failed to match the average growth rate (of all countries).
Even fewer have translated growth into broad-based prosperity. On average,
resource-driven countries score almost one-quarter lower than other countries
on the MGI Economic Performance Index. In addition, only one-third of them have
been able to maintain growth beyond the boom.
Resource-driven countries need a new growth model to transform the potential
resource windfall into long-term prosperity. In this report, we lay out such a
model, drawing on the many successful approaches that some resource-driven
countries have employed. It has six core elements: building the institutions and
governance of the resources sector; developing infrastructure; ensuring robust
fiscal policy and competitiveness; supporting local content; deciding how to
spend a resources windfall wisely; and transforming resource wealth into broader
economic development.
Extractive companies also need a new approach to the changing resource
landscape. Their relationships with governments in the countries where they
operate have often been colored by tension. Governments are under pressure
from citizens to reap a greater share of the rewards of developing their natural
resources; extractive companies are often uncertain whether governments
might withdraw their licenses or renegotiate their contracts. As exploration
and production increasingly shift to developing countries and frontier markets,
companies that can reframe their mission from simple extraction to ongoing
partnership with host governments in economic development are likely to secure
a real competitive advantage. This report offers a set of tools and approaches for
achieving this relationship.

We define resource-driven countries as those economies where the oil, gas, and mineral
sectors play a dominant role, using three criteria: (1) resources account for more than
20percent of exports; (2) resources generate more than 20percent of fiscal revenue; or
(3)resource rents are more than 10percent of economic output. We also include countries
that do not currently meet these criteria but who are expected to meet them in the near
future. See the appendix for more detail.

Our work builds on a substantial body of past analysis but explicitly

acknowledges that resource-driven countries are at different stages of their
economic development. We aim to give policy makers and extractive companies
concrete and practical information to guide their approaches.

Investment of between $11trillion and $17trillion

could transform resource-driven countries
As a result of generally rising resource prices and the expansion of production
into new geographies, the number of countries in which the resources sector
represents a major share of their economy has increased significantly. In 1995,
there were 58 resource-driven economies that collectively accounted for
18percent of global economic output. By 2011, there were 81 such countries,
accounting for 26percent of global economic output (ExhibitE1).

Exhibit E1
The number of resource-driven countries has increased by more than
40 percent since 1995, and most new ones have low average incomes
Number of resource-driven countries over
time, by income class1
81

17
58

Income class at time of becoming

resource-driven2
%, 19952011
40%

High

21

Low income

22

Lower-middle income

19

27

Upper-middle income
High income

8
9

16

1995

2011

% of world GDP

18

26

% of world population

18

49

11%
Upper
middle 25%

54% Low
11%

Lower
middle

1 We define resource-driven countries using three criteria: (1) resources are more than 20 percent of exports; (2)
resources are more than 20 percent of fiscal revenue; or (3) resource rents are more than 10 percent of GDP. Where
data were not available, we estimated based on the nearest years data.
2 World Bank income classifications based on per capita gross national income (GNI) by country; thresholds updated
annually. In 2011, the World Bank thresholds for categorization were $1,026 for lower-middle income, $4,036 for uppermiddle income, and $12,476 for high income.
NOTE: Numbers may not sum due to rounding.
SOURCE: UNCTADstat; International Monetary Fund; World Bank; IHS Global Insight; McKinsey Global Institute analysis

McKinsey Global Institute

Reverse the curse: Maximizing the potential of resource-driven economies

Many of these new resource-driven countries have very low incomes. Of the
countries that have become resource-driven since 1995, more than half were
defined as low income by the World Bank when they became resource-driven.2
The increasing number of economies that rely on natural resources underlines
how important it is for their governments to manage their resources wisely and to
cultivate sound and productive relationships with extractive companies.
There is, of course, no certainty about the future direction resource prices will
take and how these trends will affect growth in resource-driven economies.
However, the following factors should be considered:
The unprecedented scale of new demand. More than 1.8billion people will
join the ranks of the worlds consuming class by 2025.3 The growth of India
and China is historically unprecedented: it is happening at about ten times the
speed at which the UnitedKingdom improved average incomes during the
Industrial Revolution and on around 200 times the scale. The new demand
caused by this consuming class is huge. If we look only at cars, for example,
we expect the global car fleet to double to 1.7billion by 2030. Demand from
the new consuming classes will also trigger a dramatic expansion in global
urban infrastructure, particularly in developing economies. Every year, China
could add floor space totaling 2.5 times the entire residential and commercial
square footage of the city of Chicago. India could add floor space equal to
another Chicago annually.
The need for new sources of supply. Historically, much of the existing
supply of resources has come from the Organisation for Economic Cooperation and Development (OECD) group of developed economies, but many
of these resources are nearing depletion. Previous MGI research estimated
that, in the absence of significant productivity improvements, the supply of
energy and steel would have to increase at a rate 30 to 60percent higher
than the rate in the past 20years.4 Almost three-quarters of that supply in
the case of energy is necessary to replace existing sources that are coming to
the end of their useful lives. Peter Voser, chief executive officer of Shell, stated
in 2011 that the equivalent of four Saudi Arabias or ten NorthSeas over the
next tenyears needs to be added just to replace declining production and
to keep oil output flat.5 Even if the world were able to achieve a step change
in resource productivitythe efficiency with which resources are extracted
and usednew sources would still be required to replace those that are
running out.

World Bank income classifications are based on per capita gross national income. Thresholds
are updated annually. In 2011, the World Banks income thresholds were: low income, $1,025
or less; lower-middle income, $1,026$4,035; upper-middle income, $4,036$12,475; and
high income, $12,476 or more.

We define members of the consuming class as those with daily disposable income of more
than $10 (adjusted for purchasing power parity) and draw on the McKinsey Global Institute
Cityscope 2.0 database.

Resource Revolution: Meeting the worlds energy, materials, food, and water needs,
McKinsey Global Institute and the McKinsey Sustainability & Resource Productivity Practice,
November 2011.

Rush is on to develop smarter power, Financial Times Special Report, September 29, 2011.

High levels of new investment will be needed to meet demand for resources and
replace existing sources of supply. Even if we assume a significant improvement
in resource productivity and shifts in the primary energy mix consistent with
achieving a 450ppm carbon pathway, MGI estimates that $11trillion to $17trillion
will need to be invested in oil and gas, and minerals extraction by 2030.6 This
is 65 to 150percent higher than historical investment over an equivalent period
(ExhibitE2).

Exhibit E2
Investment in oil and gas and minerals may need to increase at more than
double historical rates to meet new demand and replace existing supply
Annual investment requirements1
2012 $ billion

Minerals2

201330
scenarios

Oil and
gas

201330
scenarios

19952012

Growth capital expenditure

Replacement capital expenditure

165

121

Supply
expansion

+162%

286

451

299

Climate
response

225

200312

41 57 98

220

+119%

Supply
expansion

110

105

Climate
response

110

82

445

749

Total cumulative
investment in mining
and oil and gas
could be as high as
$17 trillion by 2030

215

192

1 See the appendix for further details on the methodology.

2 Includes iron ore, coal, copper, and an estimate for other mineral resources.
NOTE: Numbers may not sum due to rounding.
SOURCE: McKinsey Energy Insights; McKinsey Basic Materials Institute; Wood Mackenzie; Rystad Energy; IHS Global
Insight; World Bank; McKinsey Global Institute analysis

Historically, almost 90percent of that investment has been in high-income

and upper-middle-income countries. But in the future, the share of resource
investment outside these two groupsto low-income and lower-middle-income
countriescould almost double. Almost half of the worlds known mineral and
oil and gas reserves are in countries that are not members of the OECD or the
Organization of the Petroleum Exporting Countries (OPEC).
This undoubtedly understates the true potential for resource production in the
developing world, given that relatively little exploration has taken place in these
countries. For example, there is an estimated $130,000 of known sub-soil assets
beneath the average square kilometer of countries in the OECD.7 In contrast,
only around $25,000 of known sub-soil assets lie beneath the average square
kilometer of Africa, a continent that relies heavily on exports of natural resources.
This huge disparity does not reflect fundamental differences in geology. It is likely

A 450ppm pathway describes a long-term stabilization of emissions at 450ppm carbon

dioxide equivalent, which is estimated by the Intergovernmental Panel on Climate Change
(IPCC) to have a 40 to 60percent chance of containing global warming below the 2C
threshold by the end of the 21stcentury.

Paul Collier, The plundered planet: Why we mustand how we canmanage nature for
global prosperity, Oxford University Press, 2011.

McKinsey Global Institute

Reverse the curse: Maximizing the potential of resource-driven economies

that Africa has more, not fewer, assets than advanced economies that have been
extracting resources for two centuries. But to date, there has been only limited
international investment in exploration and prospecting in Africa. Much of that
continents resources still await discovery.
If governments in low-income and lower-middle-income countries use their
endowments wisely and develop effective collaboration with extraction
companies, they can potentially transform their economies and the lives of their
citizens. How large could the prize be? Based on a range of methodologies,
including estimates from industry experts, announced projects, and equalization
of investment per square kilometer (excluding OPEC countries), cumulative
investment of between $1.2trillion and $3trillion is possible in low-income and
lower-middle-income countries by 2030 out of the worldwide total of $11trillion to
$17trillion. In the high case, this would be almost $170billion a year, more than
three times development aid flows to these countries in 2011.
If all resource-driven countries were to match the average historical rate of
poverty reduction of the best performers in this group, there is potential to lift
540million people out of poverty by 2030 overall (ExhibitE3).8 This is more than
the number of people that China managed to shift out of poverty over the past
two decades.

Exhibit E3
Investment in resource extraction could trigger economic and social
transformation in lower-income countries over the next two decades
Resource investment in low-income and
lower-middle-income countries1
2012 $ billion2

Potential upside
Base case

3,015

Potential poverty reduction in

resource-driven countries
Million people living in
Nonresource-driven
extreme poverty
countries

1,215

Resource-driven
countries

372
1,770

835
1,245

19952012 201330

3.6x
Resource extraction
investment in lowerincome countries
could potentially
more than triple from
historical levels

-540

843

2010

303

Potential to take
more people out
of poverty in
resource-driven
countries than
China did in the
past 20 years
(~528 million)

2030

1 As defined by the World Bank on the basis of per capita GNI in 2011. Investment includes oil and gas and minerals.
2 This represents the share of the total global cumulative investment to 2030 (up to $17 trillion in total) that could be
focused on low-income and lower-middle-income countries. See the appendix for further details on the methodology.
NOTE: We have not shown poverty statistics for nonresource-driven countries to 2030.
SOURCE: McKinsey Energy Insights; McKinsey Basic Materials Institute; Wood Mackenzie; Rystad Energy; IHS Global
Insight; World Bank; McKinsey Global Institute analysis

Further details on the methodology can be found in the appendix.

The 20th-century resource-development model

wont deliver this potential
The windfall from natural resources represents a large opportunity for developing
countries, but there is no guarantee they will be able to seize it and achieve
sustainable, broad-based prosperity using resources as a platform. Although it
is difficult to compare the economic performance of resource-driven countries
due to limited data and the lack of a suitable control group, available evidence
suggests that they have tended to underperform economies that do not rely on
resources to the same extent. Almost 80percent of resource-driven countries
have below-average levels of per capita income. Since 1995, more than half of
these countries have failed to match the global average (unweighted) per capita
growth rate. Even when resource-driven economies manage to sustain aboveaverage economic growth over the long term, they do not necessarily enhance
prosperity in the broader sense, as measured by MGIs economic performance
scorecard.9 On average, resource-driven countries score almost one-quarter less
than countries that are not driven by their resources, even at similar levels of per
capita GDP (ExhibitE4). In Zambia, for example, poverty levels increased from
2002 to 2010 despite strong economic growth.10

Exhibit E4
Resource-driven countries have struggled to
transform wealth into longer-term prosperity
MGI economic performance scorecard1
Index

Resource-driven
Not resource-driven
Average economic performance score
by income bracket
$ per capita

0.9
0.8
0.7

Resourcedriven2

Not
resourcedriven

0.6

01,000

0.24

0.28

0.5

1,0003,000

0.31

0.41

0.4

3,0005,000

0.36

0.46

5,00010,000

0.42

0.51

10,00020,000

0.46

0.64

20,00040,000

0.73

0.78

40,000+

0.88

0.90

0.3
0.2
0.1
0
0

15,000

30,000

45,000

60,000

75,000

90,000

Per capita GDP

2005 $
1 MGI index is based on metrics covering productivity, inclusiveness, resilience, connectivity, and agility.
2 Includes six future resource-driven countries.
NOTE: Three resource-driven countries have been excluded due to lack of data.
SOURCE: McKinsey Global Institute analysis

There are three broad reasons for this. The first is that many countries have
struggled to develop sufficiently competitive resources sectors and ensure that
production and investment are somewhat shielded from volatility in resource
prices. Some countries have failed to create a supportive business environment
(for example, they have not dealt with infrastructure bottlenecks), have created
political risk that deters investors, or have put in place inappropriate fiscal
regimes. In some cases, resentment within government and among citizens about
what they perceive to have been a failure to capture a fair share of resource

The MGI economic performance scorecard measures economic progress across five
dimensions: productivity, inclusiveness, resilience, agility, and connectivity. See the appendix
for further details on the methodology and the specific metrics used to assess performance.

10 PovcalNet, http://iresearch.worldbank.org/PovcalNet/index.htm.

McKinsey Global Institute

Reverse the curse: Maximizing the potential of resource-driven economies

rents has led to nationalization, which in turn has frequently precipitated a fall in
foreign investment and a severe economic downturn.
Second, countries have often failed to spend their resource windfalls wisely. They
have been unable to manage macroeconomic instability and corruption and have
struggled to use resource rents for productive long-term investment that creates
clear benefits for a large share of the population. Since 2000, the average annual
volatility of metals prices has been twice as high as in the 1990s. Such volatility
can result in overspending during booms and excessive borrowing during busts.
Too often, governments flush with resources revenue have spent it wastefully,
often losing funds through corruption or spending them on increasing publicsector salaries.
Finally, countries have struggled to develop nonresources sectors, and this
has left their economies even more susceptible to volatility in resource prices.
Resource-led export booms have often led to exchange-rate appreciation that
has made other sectors, including manufacturing, less competitive in world
markets and has led to domestic cost inflation. Such effects have been dubbed
Dutch disease, an expression coined by The Economist in 1977. These effects
are often compounded by weak institutional development in these countries
because the flood of money can encourage conflict and make governments
complacent about putting in place the building blocks of long-term development.
Although we acknowledge that there are many pitfalls facing resource-driven
countries, some have managed successful transformations, establishing best
practice that other nations can emulate. Our analysis suggests that there are three
areas to get right. The first is the effective development of resources, where there
are issues related to the role of the state in developing effective institutions and
governance of the resources sector and to ensuring that the right infrastructure
is in place. The second is capturing value from resources. Here, it is important to
examine not only fiscal policythe exclusive focus of many governments striving
to make their resources sectors competitive and attractive for investorsbut also
broader issues affecting competitiveness, such as production costs, political risk,
and the provision of local content. Third, successful resource-driven countries
have managed to use the value they receive from resources to build long-term
prosperity. On this third imperative, we look at issues around spending resource
windfalls wisely and how best to pursue effective economic development.
It is difficult to find appropriate measures to assess the performance of countries
in each of the strategic areas we highlight, so we have used the best available
proxies to identify the ten countries that have had the highest performance in
each area (ExhibitE5).11 We then considered the lessons from these countries
(as well as other relevant examples) on the six aspects in these key areas.
Even among these leading countries, we find significant opportunities to
improve performance.

11 See the appendix for further details on the methodology.

Exhibit E5
Countries performing well across the six areas of the resources value chain
Develop resources

Transform value into

long-term development

Capture value

Institutions and
governance

Infrastructure

Fiscal policy and

competitiveness1

Local content
development

Spending the
windfall

Economic
development

Norway

Canada

Canada

Canada

Norway

Norway

Canada

Malaysia

Chile

Norway

Australia

Qatar

Australia

Norway

Norway

Qatar

Canada

Australia

UAE2

Australia

Botswana

UAE2

Bahrain

Iceland

Chile

Lithuania

Mexico

Australia

Brazil

Canada

Iceland

Saudi Arabia

Australia

Iceland

Kuwait

UAE2

Qatar

Namibia

Bulgaria

Malaysia

Botswana

Israel

Brunei Darussalam UAE2

Peru

South Africa

Colombia

Bahrain

Oman

Iceland

Brazil

Lithuania

Chile

Brunei Darussalam

10

Brazil

Azerbaijan

Colombia

Guatemala

South Africa

Chile

1 Analysis restricted to mining sectors due to data availability and comparability issues. The analysis is based on country
risk, access to skills, regulatory duplication, and taxation. The assessment excludes other aspects of competitiveness,
such as energy and wage costs, and other regulatory barriers.
2 United Arab Emirates.
NOTE: Based on a variety of publicly available sources of information. See the appendix for further details on the
methodology.
SOURCE: Revenue Watch; World Economic Forum; World Bank; United Nations Educational, Scientific and Cultural
Organization; UN Human Development Report; Yale Environmental Performance Index; Fraser Institute;
Morningstar; International Monetary Fund; International Budget Partnership; McKinsey Global Institute analysis

Institutions and governance of the

resources sector
There is a common view that a government has only two choices in the way
it participates in the resources sector: letting private-sector firms operate with
minimal involvement from the state beyond taxation and regulation or controlling
production through a state-owned company. However, the range of possible
government roles is much wider than this, as the following examples illustrate:
No state ownership. In Australia and Canada and elsewhere, the state does
not have direct involvement in the industry but receives taxes or royalties
or both.
Minority investor. The state has a minority stake in a company but does not
play an active role in its management or direction, as with Thailands stake in
PTT Exploration and Production (PTTEP).
Majority-owned, with limited operatorship. The state has a majority stake
in a company and plays a role in the companys management, but less than
10percent of the companys production is operated by the state, or the state
operates exclusively in certain segments such as onshore oil. Examples
include the Nigerian National Petroleum Corporation (NNPC), Angolas
Sonangol, and Indias Hindustan Copper.
Majority-owned operator. These companies are fully or majority-owned by
the state, and more than 10percent of the companys production is operated
by the state company. Examples include Petrobras in Brazil, Norways Statoil,
and Debswana in Botswana.

McKinsey Global Institute

Reverse the curse: Maximizing the potential of resource-driven economies

Government monopolist. Pemex in Mexico and Saudi Aramco in Saudi

Arabia are fully owned by the state. Those and other companies in this
category account for more than 80percent of the countrys total production.
The popularity of each type of participation varies according to the resource.
Today, more than half of oil and gas producers in our database, representing
almost three-quarters of world production, are fully or majority state-owned.
In contrast, governments have majority- or fully owned state companies in
only about 24 and 20percent of countries with iron ore and copper resources,
respectively, accounting for 35 and 43percent of production in each case.
Our analysis suggests that no single model of government participation works
best in all countriescountries that have taken the same approach have
experienced vastly different levels of success (ExhibitE6). The best approach
depends on the context.
Regardless of the model chosen, three guiding principles are vital for successful
state participation. First, governments need to establish a stable regulatory
regime with clear rules and well-defined roles for each player in the sector.
Second, it is important to ensure that there is competitive pressure by exposing
national operators to private-sector competition, strongly benchmarking
performance, or imposing other market disciplines such as scrutiny from private
shareholders or bondholders. Finally, the state needs to play a central role in
attracting and retaining world-class talent into the sectoreven more important if
the state chooses to play a more active operational role.

Exhibit E6
No one model of state participation has clearly outperformed others
in achieving growth in resource production

Production growth rate per country

Oil and gas production growth1

Compound annual growth rate, 200312 (%)

Average growth rate per archetype

20
15
10
5
0
-5
-10

Standard
deviation
%

No state
ownership

14

Minority
investor

Majorityowned,
limited
operatorship
2

Majorityowned
operator
5

Government
monopolist

Multiple

Average
deviation
across
archetypes

1 Includes only countries producing more than 100 kilo-barrels of oil equivalent per day.
SOURCE: Rystad Energy; McKinsey Global Institute analysis

10

Infrastructure
On average, resource-driven countries do not compare favorably with the
rest of the world on their infrastructure, and this often puts investors off.12 The
Fraser Institutes survey of mining companies finds that more than 55percent
of investors considered infrastructure a deterrent to investment in 15 of the 58
countries analyzed.13 Drawing on research by MGI and McKinseys Infrastructure
Practice, we estimate that resource-driven countries will together require more
than $1.3trillion of annual total infrastructure investment over the next 17years
to sustain projected economy-wide growth.14 This is almost quadruple the annual
investment that these countries made during the 17-year period from 1995 to
2012.15
This could be particularly challenging given that capital markets are not well
developed in many resource-driven countries. However, these economies can
help to address the infrastructure imperative by transforming the productivity
of infrastructure investmentin other words, they can do more with less.
Previous MGI research has identified three main levers that can help countries
obtain the same amount of infrastructure for 40percent less: improving project
selection and optimizing infrastructure portfolios; streamlining delivery; and
making the most of existing infrastructure, including sharing it. The third area is a
particular opportunity for resource-driven countries given the large infrastructure
requirements of major extractive projects.
Extractive companies are major investors and developers of infrastructure,
and they are expected to invest almost $2trillion in infrastructure in resourcedriven countries in the period to 2030.16 Given the huge need, we believe that
resource-driven countries should look closely at ways of sharing infrastructure.
By doing so, they can take advantage of private-sector capital and know-how;
build stable, long-term partnerships with extractive companies; and achieve
broader social benefits from the infrastructure that is put in place. We estimate
that nearly 70percent of investment in resource infrastructure could potentially
be shared among different operators, and we see the largest opportunities in
power in mining areas and pipelines in oil regions. The remaining 30percent
could potentially be shared between industry and other users. Examples include
building roads that allow other users to benefit or ensuring that power capacity
is sufficient to provide excess power to the grid. Of course, governments must
carefully evaluate the likely costs and benefits of infrastructure sharing case by
case. Overall it appears that power projects are good candidates for sharing as
the benefits are high and coordination costs low. But port and rail projects, while
often having substantial benefits, can create high costs related to sharing and
therefore must be particularly carefully reviewed (ExhibitE7).

12 Global competitiveness report 20122013, World Economic Forum, 2012.

13 Survey of mining companies 20122013, Fraser Institute, February 2013.
14 Infrastructure productivity: How to save $1trillion a year, McKinsey Global Institute and
the McKinsey Infrastructure Practice, January 2013. Our estimates include road, rail, port,
airports, power, water, and telecommunications.
15 All figures in real 2010 US dollars.
16 This figure includes road, rail, port, power, and water facilities constructed by mining or oil
companies as part of a specific project, and all crude and gas pipeline construction.

McKinsey Global Institute

Reverse the curse: Maximizing the potential of resource-driven economies

11

Exhibit E7
While infrastructure sharing is generally beneficial,
the related costs of projects vary substantially

Average benefit
Range of benefit

Costs/benefits of a range of shared infrastructure projects1

Average cost
Range of cost

High

Medium

Low
Infrastructure
class

Rail

Port

Pipelines

Water

Power

Power

Power

Type of industry

Bulk

Bulk

Gas

Bulk

Bulk

Base

Precious

Number of
projects assessed

1 Based on an assessment of four types of benefits (economies of scale, economies of scope, spillover effects, and the
likelihood of alternative investment) and five types of costs (efficiency loss, coordination issues, contracting issues,
obstacles to future expansion, and issues with compensation mechanisms). Each benefit/cost was evaluated from 1 (low)
to 3 (high) and then averaged across projects within the same category.
SOURCE: Vale Columbia Center; McKinsey Global Institute analysis

Governments need to think carefully about their approach to resource-related

infrastructure to ensure that it provides the maximum benefits to society. Case
studies suggest that the following lessons are important:
Plan early. Early planning and coordination are essential to ensure
infrastructure is delivered to maximize use and efficiency. In the Pilbara region
of Western Australia, for example, much of the early infrastructure was built
separately by mining operators with limited attention to sharing opportunities.
Once made, these decisions prove much more difficult to unwind.
Rigorously assess the costs and benefits of infrastructure sharing. It
is critical to conduct a detailed assessment of benefits such as economies
of scale and scope, and potential costs related to contracts and difficulties
in coordination.
Pick the right sharing model given the context. We have identified five
models for infrastructure sharing, which vary in terms of the users, operators,
and owners. There is no one universally appropriate model. If infrastructure is
to be provided by a third-party private operator, it is likely that the government
will need to have strong regulatory capacity in order to provide that operator
with incentives to invest without the promise of unreasonable returns that
impose large costs on the government. Similarly, consortia models can be put
in place only in situations where multiple extractive companies are operating
in the same sector and the same area. Government provision requires a
strong and effective state that has access to sufficient funds for investment
in infrastructure.

12

Competitiveness and fiscal policy

Countries have much to gain from doing all they can to ensure that their
resources sectors are as globally competitive as possible. A robust resources
industry creates jobs, contributes to a governments finances through tax and
royalty payments, and ensures sustained spending on exploration, increasing
the viability of marginal deposits. National competitiveness becomes even more
important as major new projects turn out to be more expensive and complex
and as greater volatility in resource prices increases the risk of projects being
postponed or canceled.
Yet governments in resource-driven countries have tended to focus too
narrowly on fiscal policy, without considering the broader competitiveness
implications for their economies. In this context, we created the McKinsey
Resource Competitiveness Index, which encompasses three major elements
of competitiveness: production costs, country risk, and the government take
(the share of revenue that accrues to the government). Our approach takes
into account the real economics of projects, including a countrys geology and
factors such as the availability of infrastructure and regulatory or policy risks.
Governments have the ability to affect all three of the elements of competitiveness
including, of course, how much of the revenue pie they will take by setting
royalties and taxes.
Production costs vary significantly relative to revenue depending on the type of
resource and the geology of any particular asset. Costs (as a share of project
revenue) are generally higher in mining than in oil and gas and for new sites.
The index demonstrates that the government take is closely correlated to
production costs. In essence, when production costs are high, the government
take is necessarily lower to ensure that costs are competitive with alternative
investments. This is true for individual resources and across resources.
Governments obviously cannot control factors such as the proximity of resource
deposits to the coast, the quality of crude oil, or mineral grades. But there are still
avenues available to reduce capital and operating costs, especially by focusing
on regulation, supply chains, productivity, and cooperation with the industry.
Recent McKinsey work on liquefied natural gas (LNG) in Australia estimated that
government and industry could reduce operating costs by more than 50percent
(ExhibitE8).
Political or regulatory risk (measured as a share of the value of a project)
can sometimes amount to almost 40percent of the value of the government
take expressed as apercentage of revenue. This significantly weakens the
competitiveness and attractiveness of the country. Even allowing for belowoptimal levels of government take, this demonstrates the importance of risk to
companies. There are large opportunities for governments to reduce risk by
developing their ability to understand and negotiate contracts (ensuring that the
contracts are fair and seen to be fair), adopting a set of formal legal mechanisms
to help reassure investors, and generally improving interaction with investors and
companies. Governments will achieve far more by focusing on production costs
and reducing risks in collaboration with resource companies than by narrowly
focusing on trying to increase the government take. Successfully reducing
production costs and risks produces a larger revenue pie that can then be shared
by the government and the resource companies.

McKinsey Global Institute

Reverse the curse: Maximizing the potential of resource-driven economies

13

Exhibit E8
McKinsey research estimates that government and industry action
can cut costs by more than 50 percent
Impact on potential cost reduction measure by government and industry1
%
Current cost

100

Regulation

13

Supply chain

12

Labor productivity

813

Industry cooperation
Further project optimization
Optimized cost

8-15
918
4973

1 Based on McKinsey analysis of liquefied natural gas (LNG) projects in Australia.

NOTE: Numbers may not sum due to rounding.
SOURCE: Extending the LNG boom: Improving Australian LNG productivity and competitiveness, McKinsey Oil & Gas and
Capital Productivity Practices, May 2013; McKinsey Global Institute analysis

Local-content development
Beyond generating taxes and royalties, the extractive industry can make
substantial contributions to a countrys economic development by supporting
local employment and supply chains. Between 40 and 80percent of the revenue
created in oil and gas and in mining is spent on the procurement of goods and
services, often exceeding tax and royalty payments in some cases.
Increasing the proportion of goods and services that are procured locally (local
content) is often a key goal for policy makers in resource-driven countries. In
fact, we find that more than 90percent of resource-driven countries have some
form of local-content regulation in place.
But if these regulations are designed poorly, they can substantially reduce the
competitiveness of the resources sector, endangering the jobs and investment
that it brings, as well as violate free trade agreements. Regulation can, for
instance, cause cost inflation or delay the execution of projects. Brazil has
increased local-content requirements to up to 65percent in bidding rounds
for offshore licenses. Given the profile of typical offshore production, this often
implies that operators in Brazil are legally bound to source FPSO vessels locally.
In the past, local operators took much longer to build these vessels than global
companies, leading to significant project delays. While performance of Brazilian
shipyard operators appears to have improved recently, there is still the potential
risk of delays in project execution and production ramp-up.

14

Unfortunately, we find that much of the current local-content legislation does not
appear to be well designed (ExhibitE9).

Exhibit E9
Current local content regulations are often not well designed
% (n = 271)

Are local content regulations tailored

to the resources sector?

Yes

Are they targeting specific value pools

within the resource sector (for those
countries with sector-specific targets)?

Yes

Is there a phased buildup for achieving

local content targets?

Yes

Does government support the private

sector to achieve the targets (e.g.,
training centers)?

Yes

54

No

46

35
65

No

27
73

No

31

No

69

1 Sample is focused on the 27 (of the total set of 87) resource-driven countries that have hard legislation.
SOURCE: McKinsey Global Institute local content database; McKinsey Global Institute analysis

The following four gaps stand out:

Lack of sector-specific requirements. Almost half of resource-driven
countries in our sample had blanket requirements on local content that apply
across all sectors.
Failure to target the right value pools. Approximately two-third of countries
in our database do not target specific value pools such as basic materials like
steel and cement; low- to medium-complexity equipment and parts including
pumps, explosives, and chemicals; or high-complexity equipment and parts.
Of those countries that do target specific value pools within the resources
sector, at least half fail to target the correct value pools in terms of fit with
local capabilities. For example, the Democratic Republic of the Congo requires
that 96percent of roles in the mining sectorand 98percent of management
positionsbe filled by nationals, but the number of people with the necessary
technical and managerial skills and experience is simply not available.
No time frames stipulated or sunset clauses defined. Very few resourcedriven countries with local-content regulation take a phased approach
in which they gradually build up the share of local content. Instead, most
regulation calls for the immediate fulfillment of local-content shares. The result
is either targets so high that they compromise competitiveness, in some cases
preventing the resource from being developed at all, or so low that they are
meaningless in terms of offering economic benefits to the local population.
In addition, we found no evidence of any sunset clauses on the preferential
treatment given to local firms in this legislation, potentially reducing the
incentive of these firms to become globally competitive.

McKinsey Global Institute

Reverse the curse: Maximizing the potential of resource-driven economies

No supporting government institutions. In more than two-thirds of the

countries in our database, there is no structural government support for
resource companies to achieve local-content targets through providing
training centers, for instance, or financing for local suppliers to help them build
up their businesses.
Our analysis of a number of case studies and McKinsey experience suggests that
officials should apply the following five fundamental principles to achieve effective
local-content policies:
Know where the value is and where the jobs are. The first imperative
is for policy makers to gain detailed knowledge of the resources supply
chain so that they understand where total value is in terms of revenue and
employment. In mining, our analysis implies that governments should focus
on the production phase if they want to increase local content, because this
is when the bulk of spending takes place. In this phase, the largest spending
categories are manual and low-skilled labor; basic materials; management,
and engineering, procurement and construction management (EPCM);
business support services; and utilities. The patterns of spending in oil and
gas projects are different from those in mining projects. In oil and gas, a much
larger share of total procurement funds is spent on integrated plant equipment
solutions and a much lower share on manual and low-skilled labor. The
potential to create jobs also differs from total procurement spending in many
cases. Several categories are relatively more labor-intensive and therefore
create more jobs than other categories.
Understand the competitive edge. The spending that can be captured
locally varies significantly among countries due to a number of factors,
including the type of resource, the level of industrialization, the countrys
unique aspects such as location and language, and whether other industries
have a significant presence. We find that in advanced economies such as
Australia, up to 90percent of total (mining) spending in the production phase
is highly amenable to local content. In underdeveloped countries that have
not yet industrialized and that have relatively new resources sectorsGuinea
being an examplevery little of overall spending is amenable to local content,
at least initially.
Carefully assess the opportunity cost of regulatory intervention. When
governments impose local-content requirements, they must carefully assess
whether regulations are too unwieldy for companies, unnecessarily raising
costs, potentially causing significant delays, and damaging competitiveness.
They should also guard against creating perverse incentives. For example,
regulation that automatically gives contracts to any local provider bidding
within 10percent of the best price will discourage local firms from becoming
competitive with multinationals unless there is a clear sunset clause that
stipulates when this preferential support will end.
Dont just regulateenable. Most resource-driven countries devote too little
attention to creating an environment that supports the achievement of localcontent targets. Government can assist in a number of areas, from helping to
develop skills to providing financing and coordinating local suppliers.

15

16

Carefully track and enforce progress. Making procedures simple to

administer and track, appointing a credible regulator with enforcement power,
and creating a regulatory body that can coordinate efforts are crucial to
making progress on local content.
Private companies play an essential role in the development of local content.
There are numerous cases in which a private company took the lead in
developing local suppliers, not only to comply with local-content regulation but
also to improve their cost competitiveness. It is crucial for companies to have
a detailed understanding of their future spending profile and the local supplier
base; to organize effectively to achieve their local-content goals by rooting them
deeply in company processes for procurement and human resources rather than
corporate social responsibility; to engage proactively with the government as they
make local-content policy decisions; and to support the development of local
supply chains through targeted skill-building and R&D programs.

Spending the windfall

There is a broad range of approaches for governments to use resource revenues.
They can invest the money abroad or use it to repay foreign debt; MGI research
has shown that sovereign wealth funds worldwide controlled $5.6trillion at
the end of 2012 and that 57percent of this sum came from natural resources.
Countries can also invest at least a portion of their resources revenue at home
in infrastructure and other key areas. Botswana, for instance, earmarks mining
revenue for specific development purposes such as education and health
through its Sustainable Budget Index. Some countries direct a share of revenue
to specific regions for both investment and consumption purposes. Brazil splits
its disbursement of CFEM (Financial Compensation for the Exploration of Mineral
Resources) mining royalties so that 65percent goes to local governments,
23percent to mining states, and the remainder to the National Department of
Mineral Production. Governments can also use resources revenue more generally
for domestic needs such as higher wages for public-sector workers, subsidies for
energy resources, or other social-welfare programs. Finally, they can make direct
transfers to citizens, as Alaska does with a portion of its oil revenue.
History is littered with examples of governments squandering resource windfalls
either through corruption or simple mismanagement. Such waste can, and must,
be avoided. While the best approach may vary somewhat depending on the
country, there are some valuable lessons from international experience to date
that we think broadly apply. Governments should consider the following if they are
to reap the full benefits of their resource endowments:
Set expectations. In order to counter ill-informed pressure that could lead
to wasteful spending, governments need to agree early in the process on the
principles for how the resource wealth will be used and manage expectations
among their citizens accordingly. In Ghana, the government undertook an
extensive consultative exercise to discuss how to use the countrys oil wealth,
and interestingly, the countrys poorest regions were the most eager to save
funds.17 When Botswana discovered its diamond wealth, the government
quickly spread the message, Were poor and therefore we must carry a heavy

17 Joe Amoako-Tuffour, Public participation in the making of Ghanas petroleum revenue

management law, National Resource Charter Technical Advisory Group, October 2011.

McKinsey Global Institute

Reverse the curse: Maximizing the potential of resource-driven economies

load. This message helped the government to justify investing more of the
money rather than spending it.
Ensure spending is transparent and benefits are visible. Governments
need to ensure that institutional mechanisms are put in place for a high level of
transparency so that recipients see the benefits of invested resource windfalls.
In Uganda, the finance ministry sends details to the local media of all the
money each school receives from the state. This has resulted in 90percent
of nonsalary funding actually getting to schools instead of around 20percent
as in the past (with the remainder being misappropriated). In Botswana, the
governments Sustainable Budget Index monitors whether the mineral revenue
it collects is being used to promote sustainable development and finance
investment expenditure, including recurrent spending on education and
health.18
Smooth government expenditure. Setting a target for the noncommodity
government budget balance can insulate public expenditures from volatility.
During periods of relatively high commodity prices or output, the overall
budget might accumulate a surplus, while during periods of low prices or
output it might run a deficit but leave spending intact. For example, Chile has
established a budget balance rule, defined in structural terms, with provisions
that correct for deviations in the prices of copper and molybdenum from their
long-term levels, as judged by an independent panel of experts.19
Keep government lean. Resource-driven countries often suffer from bloated
government bureaucracies. In Kuwait and the UnitedArab Emirates, for
instance, more than 80percent of the local population is employed in the
public sector. Pay increases can be large. The government of Qatar raised
public salaries by 60percent in 2012. Such approaches reduce not only
public-sector productivity but also incentives for working in the private sector,
inhibiting wider economic development. Governments should actively seek
to keep the public sector in proportion by regularly comparing ratios for each
function with those of other countries. They should also consider how they can
consistently recognize duplicative structures in the public sector that could be
consolidated.20 One method to keep pay consistent is to benchmark wages
to similar jobs in the private sector and to assign public-sector roles a clean
wage without hidden perks or privileges.
Shift from consumption to investment. Channeling some of the resource
wealth into domestic investment and savings is crucial to start transforming
natural resource wealth into long-term prosperity. Establishing institutional
mechanisms to support this process can be useful, because they can address
any bias toward government consumption spending and deficits, enhance
fiscal discipline, and raise the quality of debate and scrutiny. For example,
Australia established the Parliamentary Budget Office in July 2012 to provide
independent and nonpartisan analysis of the budget cycle, fiscal policy, and
the financial implications of proposals.

18 Towards mineral accounts for Botswana, Department of Environmental Affairs, May 2007.
19 Fiscal rules: Anchoring expectations for sustainable public finance, IMF discussion paper,
December 2009.
20 Transforming government performance through lean management, McKinsey Center for
Government, December 2012.

17

18

Boost domestic capabilities to use funds well. Resource-driven

governments need to ensure the development of strong investment
capabilities in the public sector. The International Monetary Fund (IMF) and the
World Bank jointly produce an index of public investment efficiency, enabling
countries to track progress in this area.21 Some of the key areas to address
include project appraisal, selection, implementation, and auditing.

Economic development
Very few resource-driven countries have sustained strong GDP growth for
longer than a decade. Even those that have appeared to put their economics
on a healthier longer-term growth trajectory have rarely managed to transform
that growth into broader economic prosperity, as measured by MGIs economic
performance scorecard. But doing so is not impossible. One major imperative
for governments is to focus on removing barriers to productivity across five
key areas of the economythe resources sector itself; resource rider sectors
such as utilities and construction; manufacturing; local services such as retail
trade and financial services; and agriculture. Local services, which include
hospitality, telecommunications, and financial sectors, are often seen as the
indirect beneficiaries of the resource booms. These sectors can achieve large
productivity improvements, which can often result in significant growth in GDP
and employment, but these sectors are often overlooked by policy makers. Past
MGI work has highlighted how removing microeconomic barriers can significantly
increase productivity and economic growth.22

The extractive industry has much to gain from being

more thoughtful about economic development
Governments in resource-driven economies are being tested, but so are
extractive companies operating in these environments. They face three factors
that put value at risk in these economies.
The first of these is that high and volatile resource prices have led to significant
choppiness in resource rents and increased the likelihood that governments
feel cheated and seek to renegotiate terms. Data from the Royal Institute of
International Affairs (Chatham House) show that the incidence of arbitration
corresponds strongly with the rise in oil and metal prices and mineral prices
since 2000.23 Second, exploration and production are increasingly moving
toward lower-income, less-developed markets that are often environmentally
and logistically challenging and geologically complex. This is driving up project
costs and increasing the risk of delays. Finally, extractive projects represent a
disproportionate share of these economies. For instance, the Simandou iron ore
project in Guinea is expected to produce revenue in excess of 130percent of the
countrys current annual GDP, based on forecast iron ore prices and production
growth. Extractive companies engaged in large projects such as these have
a very visible role in the economies in which they operate. They are subject to

21 Era Dabla-Norris et al., Investing in public investment: An index of public investment efficiency,
IMF working paper number 11/37, 2010.
22 Investing in growth: Europes next challenge, McKinsey Global Institute, December 2012.
23 Bernice Lee et al., Resources futures, Chatham House, December 2012.

McKinsey Global Institute

Reverse the curse: Maximizing the potential of resource-driven economies

19

greater scrutiny in the media and among citizens, who have elevated expectations
of the jobs these companies create and the tax revenue they provide.
Managing this evolving and risky landscape requires extractive companies to
shift from an extraction mindset to a development one. It would help them
to navigate the journey if they were to take a more strategic approach to their
local development activities. They need to ensure that their chosen development
priorities reflect a detailed understanding of the country in which they are
operating and that these same development priorities create lasting value to their
businesses. They also need to embed the actions they take in a relationship with
host governments that creates strong incentives for both parties to adhere to
agreements throughout the lifetime of the project.
In developing an understanding of the host country, companies need to start
with the geographical, social, economic, institutional, and other factors directly
related to resources. Then they need to go beyond a basic analysis of political,
institutional, and economic trends in the country to consider fundamental
questions such as the history of the country and its resources sector. They should
also assess how dependent government finances are on resource endowments,
as well as competitiveness factors such as the countrys position on the global
cost curve for a particular resource and its importance to global supply.
Second, companies need to be rigorous in assessing their own contribution
to broader economic development and compare their performance with
stakeholders expectations. We have developed a tool to assess the economic
contributions that companies make. It looks at five aspects: fiscal contribution;
job creation and skill building; infrastructure investment; social and community
benefits; and environmental preservation. The tool examines whether companies
match the expectations of key stakeholders such as host governments and local
communities in each of the five core areas (ExhibitE10).

Exhibit E10
We identify five core elements of a companys local development
contributions, and one critical enabler
The degree to which the company understands
stakeholder concerns, tracks its impact against those
concerns, communicates effectively with
stakeholders, and seeks to create an aligned vision
Stakeholders and
communication
The degree to which
the company meets
national tax, royalty,
and equity obligations
in a transparent
manner and seeks to
prevent corruption
The degree to which
the company seeks to
minimize associated
air, land, and water
pollution and to
reduce waste and
preserve biodiversity

Job creation and

skill building

Fiscal
contribution

Socioeconomic
development

Environmental
preservation

Infrastructure
investment

Social and
community
benefits

The degree to which the

company contributes to
its own workforce
development, supplychain development,
resource beneficiation,
and labor market job
matching/vocational
education
The degree to which the
company attempts to
create broader societal
benefits from its
infrastructure investment
in roads, power, water,
and other areas
The degree to which the
company contributes to
local communities
through health,
education, safety, site
rehabilitation, and
economic sustainability

SOURCE: McKinsey Economic Development Assessment Tool; McKinsey Global Institute analysis

20

Our analysis finds that companies efforts often do poorly in matching the
expectations of host governments. In one instance, the company prioritized, and
was performing strongly in, all areas of environmental management, but far less
well on infrastructure and job creation. Yet the latter two were the main areas of
concern for the local government. Furthermore, our pilots in this area indicate that
the performance and priorities of different parts of the same company varied. We
also find that companies have generally done a poor job of communicating their
efforts and of understanding and engaging with key stakeholders.
Finally, any package of initiatives needs to be part of a relationship with host
governments that will endure for the lifetime of the project, which can stretch for
decades. The specific ways in which companies make an effective contribution
will depend on the context, but our work with extractive clients suggests some
core guiding principles. These include being careful about signing agreements
that optimize for the short term but that could later be regarded by governments
as unfair and grounds for renegotiation; making it clear to governments what is at
stake by being transparent about the short- and medium-term contribution of the
resources sector to jobs, exports, and fiscal revenue; ensuring that the company
is seen as indispensable to the countrys broader agenda through, for example,
the technological know-how it brings, the international capital it can mobilize, and
its contribution to the countrys economic development; and being willing to play
tough in the case of reneging on agreements (using all available legal remedies).
On the latter point, an example is ExxonMobil, which seized Venezuelas cash
waterfall funds as compensation for the nationalization of the companys assets.
There will always be circumstances that an extractive company will find difficult
or even impossible to manage. But taking such a strategic approach to local
development issues can help avoid time-consuming efforts on a range of niceto-do economic development contributions and enable extractive companies to
spend more time and effort on helping host governments to create a genuine new
source of enduring competitive advantage.

McKinsey Global Institute

Reverse the curse: Maximizing the potential of resource-driven economies

The Asian Tiger economies of Hong Kong, Singapore, South Korea, and
Taiwan are noted for having achieved rapid economic growth from 1960 to 1990
though industrialization and export-led manufacturing. More recently, China has
largely followed this growth model, taking more than 500million people out of
poverty. Some resource-driven countries have tried to emulate the successful
development models of the Asian Tigers. However, this approach fails to take into
account the unique circumstances of economies driven by resources. Instead,
they should consider reframing their economic strategies around three key
imperatives: effectively developing their resources sector; capturing value from
it; and transforming that value into long-term prosperity. In each of these areas,
relevant lessons from other resource-driven countries can be tailored to the local
context. This new Resource Tiger growth model has the potential not only to
transform the economic prospects of these resource-driven economies, but also
to take more than 500million people out of poverty by 2030, and thus achieve as
great an impact as the Asian Tiger growth model.

21

22

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McKinsey Global Institute

December 2013
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