In recent years there has been a growing trend for governments to demands greater local benefits from the extractives industries. While taxes and wages often generate large revenues, mining and oil and gas companies’ supply chains offer many more times the value if products and services can be sourced from host countries. The local economy benefits from increased diversification and opportunity, while extractives firms may potentially benefit from reduced costs, as well as more effective management of local expectations. Companies have sought to support the growth of potential suppliers by providing: training; support in achieving international certification; access to capital; and mentoring to help potential suppliers to qualify for contracts.
While these programs can have great value, they can be complicated to get right. This note highlights just a few patterns to watch out and additional strategies that may be helpful (please note the focus here is on local sourcing, rather than employment or social investment). The article draws from our experience advising clients using our database of 200+ projects. The list below is broad-brush, in contrast to the detailed strategies we develop for clients, and is intended simply to provide some food for thought.
- Many host governments, under pressure to create jobs, have introduced increasingly tough local content regulations.
- A poor underlying business context may undermine firms’ efforts by discouraging the emergence or growth of SMEs.
- Complex procurement practices and standards also often make it difficult for local businesses to supply international firms.
- In markets typified by minimal competition, companies may be pressured in to placing contracts with entities controlled by politically-connected individuals.
- Programs to build local supply chains take time and can result in high up-front costs, and may only be feasible for projects which involve significant future demand for local goods.
- In April 2010, new legislation in Nigeria introduced mandatory local content measures for the oil and gas industry, including a requirement to submit a local content plan in the bidding stage of all projects.
- Freeport McMoRan’s Grasberg mine in West Papua in the recent past faced criticism partly because of perceptions that not enough was done to benefit local people.
- Black Economic Empowerment in South Africa aimed to reverse inequality in the private sector, but critics argue that it has failed to reduce inequality as the benefits have largely been captured by well connected political elites.
Potential approaches – going beyond the basics*
- Programs must be driven by business needs. Local procurement should be used as a strategic business tool and not just as a goodwill initiative.
- Designing and running a successful program takes extensive study and planning, as well as long lead times to train and equip SMEs to deliver the quality and reliability required.
- Partnerships with NGOs, microfinance organisations, donors, local and host governments, and other companies can help to leverage the impact of a local procurement plan, maximising the benefits for stakeholders and the company.
- It is vital to define what is counted as local depending on the needs of the project or operation. It is important to differentiate between community and national content and between companies that have a registered office or agency in a country and those that actually produce a product or service.
Often best results are achieved when companies second their own employees to such programs to ensure the business culture of the company is passed on to its suppliers, and that programs are kept as relevant as possible to business needs.
- Anglo American has developed a strong focus on local suppliers with significant programmes in South Africa, Brazil and Chile. Its work relies on a combination of access to capital, mentoring and capacity building, working closely with NGOs and microfinance groups.
- Sonangol, BP, Chevron, ExxonMobil and Total adopted a collaborative approach in Angola on their shared goal of supporting local suppliers. From 2005 to 2010, 302 contracts worth US$ 212m were awarded to local firms.
- Newmont used its partnership with the IFC at its Ahafo project in Ghana to set-up a linkages program to build SME capacity. Local SMEs had previously agitated for contracts. The program resulted in the award of supply contracts to 99 suppliers worth over US$14 million. Firms were validated to ensure that only local people benefitted.
In Trinidad & Tobago BP partnered with construction firm Fluor to build a large and complex offshore platform in-country, rather than in the USA. BP realized more than US$11M savings on construction of two further platforms through reduced costs and shorter fabrication times.
*Please note these points are illustrative, synthesised and do not reflect the complexity of the situations or management approaches used