The creation of a global standard on local procurement reporting for mining companies was discussed in a seminar organised by the International Institute for Environment and Development on 10 June, 2019.
Most mine sites spend more money on procurement of goods and services than they do on on taxes, employees and community investment combined. Mining has massive potential benefit for economic and social development in host countries. But civil society and official development assistance (ODA) providers have focused relatively little work and resources on the issue of backward linkages from mine sites to upstream suppliers – especially relative to transparency and use of mining tax revenue
Noticing this gap, the Mining Shared Value (MSV) initiative of Engineers Without Borders Canada was created in 2012 to act as a non-profit organisation to push and empower the global mining sector to increase local procurement in the countries and communities that choose to host extraction. This presentation was given by Jeff Geipel, founder and managing director of Mining Shared Value.
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Mining local procurement: a necessary tool in defeating the resource curse
1. Jeff Geipel
Mining Shared Value
International Institute for Environment and Development
10 June 2019
Mining Local Procurement: A Necessary
Tool in Defeating the Resource Curse
5. • All goods and services sourced by a mine site
• Local procurement: sourcing these goods and services
from local supply chains instead of global supply chains
• Local procurement is a component of “local content” –
often people incorrectly use the terms interchangeably
Procurement
2019-06-14 5
6. “Local content (also referred to as “National Content” or “Name
of country or other geographic area Content”) is generally
understood to be the local resources a project or business utilises
or develops along its value chain while investing in a host country.
This may include employment or inputs, goods and services
procured from local sources, locally hired workforces, operations
carried out in partnership with local entities, development of
enabling infrastructure, the improvement of domestic capacity,
or the improvement of local technological capabilities.”
(OECD 2016, p. 24)
Local Content vs Local
Procurement
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7. ● At least half of economic
value goes to suppliers
● In most cases more than
taxes, wages, salaries and
community investment
combined
● “Corporate Social
Investment” accounts for
less than one percent
How much do mining companies
spend on…
2019-06-14 7
8. 8
In-Country Expenditure by Recipient
“One of the interesting facts in the report is the relative level of payments to suppliers. …
In order to maximize mining’s contribution to diversification through the use of local
content” development, we need to focus on how these payments to suppliers can benefit
local business more and promote economic development”.
Christopher Sheldon, Practice Manager, Extractive Industries, World Bank
This slide is from a World Gold Council presentation in March 2015
Suppliers are generally the biggest recipients of
in-country expenditure from mining companies
9. Putting things into perspective...
92019-06-14
• Burkina Faso 2016:
• Canada gave $55 M of ODA
• One Canadian mine procured $264 M in local goods
and services
• Canadian ODA is under $6 B per year
• Canadian Mining DIA is over $90 B per year
10. Mining Shared Value:
Working to improve the social and economic benefits of
mining activity for the communities and countries that
choose to host it by increased local procurement by the
global mining industry
11. MSV’s Areas of emphasis
• Resource: Creating and compiling information and
tools for industry and stakeholder use
• Hub: Creating a thriving community of practice around
local procurement
• Champion: Working to keep local procurement on the
agenda for company frameworks, industry standards
and government policies and programming
112019-06-14
12. 2019-06-14 12
If change is not systemic
its not change at all
Mining
Companies
Government
Institutions
Research
Institutions
Corporate Social
Responsibility (CSR)
Consultants
Industry
Organizations
NGOs
13. Most mining companies* will define local based on a
combination of the following factors…
• Geographic location
• Host country regulatory definitions
• Communities impacted most by mining activities
• Ownership of firms
• Vulnerable/historically disadvantaged groups (Aboriginals in
Australia/Canada, Black Economic Empowerment in South
Africa)
*For the purpose of this presentation, “mining companies” also refers to companies doing
exploration, mine construction, EPCM/EPC work, etc.
“Local” Procurement
2019-06-14 13
14. Not all forms of local procurement create the same
degree of economic and social benefits in host countries
Technically, the purchase of imported goods from
domestically based resellers, or the purchase of services
from branches of international companies, is often referred
to as “local procurement”.
But the positive impacts of this type of local procurement
are far less than procuring goods and services that are
actually produced in- country, by firms owned by host
country citizens.
Locally “Procured” vs Produced
2019-06-14 14
15. The Development Case
2019-06-14 15
Local
Procurement
Creates jobs
Promotes skill/technology transfer
Strengthens economic linkages
Helps to formalize host economy
16.
17. • South Korea and other East Asian Economic Miracle economies utilized local
procurement/local content as a key plank in their development strategies:
o Required and incentivized automobile manufacturers to purchase parts
from domestic suppliers
o Coordinated cluster formation, skills sharing and technology transfers
utilizing a wide variety of stakeholders, such as industry associations
o Funded education and research focused on the supplying industries
• Results:
o South Korea now has the 5th largest automobile industry in the world
o Now an “advanced country” (IMF), and ranks #15 on the UN’s Human
Development Index, with a life expectancy of 81.5 years
* Many policies South Korea used during this period are now banned by WTO
South Korean East Asian Miracle
and Local Content
2019-06-14 17
18. Efficient and resilient procurement
• Lower product costs (over long term)
• Reduced delivery times
• Increased # of supplier options
Social licence to operate
• Increased benefits for local stakeholders
• Reduced risk of conflict and stoppages
• Improved relationships with government
The Business Case
2019-06-14 18
19. • The majority of mining project delays stem from
company conflicts with local communities or host
country governments, not technical problems
o Liane Lohde, Senior Economist at IFC, states that when
looking at what mining projects to invest in, warning bells
go of when there is a “(l)ack of links to the local economy -
with no plans to strengthen these links for project
construction and operation” (IGF AGM 2014)
o Franks et al (2014) paper states that projects of $3-5 billion
in capital expenditure can lose $20 million per week during
delays due to conflicts
o EY 2019 report ranks social licence #1 risk
Sourcing a Social Licence
2019-06-14 19
20. Many actors have contributed to “resource curse”
outcomes of underdevelopment in mining host countries.
But no matter who is to blame, if mining companies cannot
demonstrate how they can create positive impacts for local
communities, they will face difficulty in carrying out their
mining activities.
The Bottom Line
2019-06-14 20
23. The commodities downturn after 2010 caused by the end of
the Chinese super-cycle and 2007-08 Global Financial Crisis
laid bare the lack of transformation and widespread
economic development in the preceding “boom” decade
Government Approaches: Context
2019-06-14 23
24. • Most new mining legislation is adding local content rules,
including requirements to purchase goods and services
from domestic firms
– South Africa 2018
– Tanzania 2018
– DRC 2018
– Also Senegal, Togo, Nigeria and others on oil and gas side
Government Regulations
2019-06-14 24
25. • Technically local content rules are illegal under WTO
• No challenge to date has been brought though to any
local content law for extractive industries
– By contrast, India successful challenged by US for solar panel
local content rules, Ontario for Feed-In Tariff local content rules
by EU and Japan
Government Regulations
2019-06-14 25
26. Canada and Australia do not have local content laws officially
but they have de facto laws in that no new mine is likely to be
approved without proving community support through a
community development agreement (CDA)
- Impact benefit agreements (IBAs), Canada
- Land access agreements, Australia
Proposed legislation in Northwest Territories will explicitly
require IBAs
Community Development
Agreements
2019-06-14 Mining Shared Value – Event Name 26
27. • Companies virtually unanimous argue they do not work
and impose a burden
• Mixed record of success in mining so far, though very
little empirical data available
• Lack of ability to enforce
• The wrong targets
Do they work?
2019-06-14 Mining Shared Value – Event Name 27
28. • Legitimate concerns over corruption, use of local content
requirements to support politically connected elites
• Brazil Petrobras scandal
• Any increase in operating costs due to local content
requirements means less profit – meaning less corporate
income tax paid – opportunity cost
Do they work?
2019-06-14 Mining Shared Value – Event Name 28
29. • However, China and South Korea prove in very stark
terms that well targeted requirements do work
• Clearly they have worked well in CDAs in Canada and
Australia
• Virtually no developing country without a pre-existing
industrial base has succeeded in increasing supply to
extractive industries without them
Do they work?
2019-06-14 29
30. • Ultimate goal must be competitive businesses that do
not require protections
– Sunset clauses and performance tied extensions
• Requirements must be buttressed by meaningful
capacity building support for firms and the wider
ecosystem of business (CIRDI study)
– e.g. consideration of electricity rates, ease of doing business,
taxes and duties imposed on SMEs
– Zambia uniform manufacture example
Keys to Success
2019-06-14 Mining Shared Value – Event Name 30
36. • Aid
Keys to Success
2019-06-14 Mining Shared Value – Event Name 36
37. ODA providers and NGOs
- Technical assistance to governments
- Finance and technical support for SMEs
- Support for key infrastructure that helps facilitate local
procurement
- Chambers of Commerce strengthening
- Supplier portals (ex. Invest in Africa’s APP in Ghana, Senegal)
How does ODA fit in?
2019-06-14 37
38.
39. 1. Take stock of existing initiatives
2. Harness what is already there
3. Making backward linkages requires an all of system
approach, and someone actively making deals happen
4. Multitude of initiatives for extractive industry revenue
transparency – but none for procurement
Keys to Success
2019-06-14 39
40. Local procurement is part of the solution, but only
one part of responsible mining.
It is a necessary, but insufficient requirement to
make mining work for development.
Important Qualifications
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41. An increase in local procurement that is not managed well by a
mining company, the host country government, and/or
stakeholders, still has potential negative impacts to be
mitigated:
o Rapid influx of cash – potential inflation, alcoholism, and gender-based
violence
o Potential labour shortages in other sectors, and the vital public sector
.
Important Qualifications
2019-06-14 41
42. Nothing achieved in terms of creating benefits through
local procurement absolves mining companies of their
responsibilities to engage in ethical mining in other regards. No
number of millions created by company procurement gives the
right to a company to evade taxes, or not be environmentally
responsible for example.
Important Qualifications
2019-06-14 Mining Shared Value – Event Name 42
43. When mining activity occurs, it is in the interest of all
stakeholders to ensure it works and creates benefits (including
watchdog NGOs).
But in some cases, mining activity may not be the most
appropriate development strategy for a country or region.
The benefits, which include local procurement, must be
weighed against the negative impacts and risks caused by a
potential mining project.
Important Qualifications
2019-06-14 43
44. The question of whether mining is good for development
or not, is a distraction.
The important question to address is under what conditions will
mining contribute to development?
Local procurement is one of those conditions.
Important Qualifications
2019-06-14 44
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
Leverage point in the system become clear:
Can see over 2/3rds here of spend is procurement
In terms of economic benefits, this is the largest in country expenditure, nearly 60-70% in many cases, and more than taxes and wages combined. As shown in this study by the Worl Gold Council which surveyed its members/ procurement made up 70% of in-county expenditure.
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
The Mining Local Procurement Reporting Mechanism (LPRM) is a set of publicly available disclosures on local procurement by the mining industry that seeks to address the gaps in current reporting frameworks and sustainability systems, and to help standardise the way the sector and host countries talk about the issue. Its use facilitates comprehensive reporting on local procurement spending at site level, as well as increased detail on mining company procurement processes and due diligence practices.
Goal of having LPRM integrated into existing reporting frameworks.
The Mining Local Procurement Reporting Mechanism (LPRM) is a set of publicly available disclosures on local procurement by the mining industry that seeks to address the gaps in current reporting frameworks and sustainability systems, and to help standardise the way the sector and host countries talk about the issue. Its use facilitates comprehensive reporting on local procurement spending at site level, as well as increased detail on mining company procurement processes and due diligence practices.
Goal of having LPRM integrated into existing reporting frameworks.
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site
What are some things a mine site would need to operate? Food for lunches, uniforms, roads paved, workers for the site