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Backward Linkages (Supplying Extractives)

At a Glance
  • Procurement usually represents the single largest in-country expenditure in mining and can be leveraged to support the development of a local supply industry.
  • Host country governments will need to do extensive work to understand the goods and services they can supply for each stage in the life cycle of a mining or oil and gas project.
  • While governments employ a wide range of policies and tools to stimulate local procurement, choosing the right ones depends on a number of factors including regulatory context, stage of development, and the capacity of the local supply networks to meet the needs of extractive companies.
  • Local procurement policies need to consider the lead time necessary to develop competitive local industries, and to address the barriers (knowledge, access to finance, scale, technology, etc.) that impede such development.

Local procurement, or “backward” or “upstream” linkages, refers to the purchases of goods and services that are made “locally” in extractive industry host countries. “Locally” can refer to a combination of factors including the proximity to the extractive industry project or operation, the ownership of a supplier by citizens of the country, the participation of locally based citizens as employees, or the level of value addition that takes place for the goods that are produced. The definition of the term “local” is explored in Defining Local.

The development of a local supply industry provides an opportunity to increase revenue for the host country as the number of new businesses rises and existing businesses scale up, and to improve the trade balance. Jobs creation, knowledge transfer, and skills upgrading may also occur. Indeed, procurement usually represents the single largest in-country expenditure in mining,[1] and a significant proportion in oil and gas,[2] and could be leveraged to support the development of a local supply industry. For companies, local procurement can reduce cost over the long-term, support social license to operate, increase supply chain resilience, and reduce delivery times for products. In some cases, local knowledge and experience within local suppliers help to lower procurement costs. For example, in remote areas of Canada mining company procurement management often points to local suppliers' knowledge of operating conditions in harsh winter as important factors to reduce risk.[3]

There are a variety of opportunities for local procurement throughout the life of an extractive industry project, and at each stage proactive steps need to be taken to determine what goods and services can already be supplied, and what products could be competitively supplied if support is provided to local firms.[4] Some extractive industry companies provide broad information on the opportunities that exist, such as Newmont Mining which has a website that describes a mine life cycle and the respective opportunities. However, in all cases host country governments will need to do extensive work to understand the goods and services they could supply towards each stage of the mining or oil and gas project life cycle of a project.

Figure 1: Local procurement opportunities at difference stages of extractives project lifecycle, reprinted from Ana Maria Esteves et al., Procuring from SMEs in Local Communities: A Good Practice Guide for the Australian Mining, Oil and Gas Sectors, (Brisbane: Centre for Social Responsibility in Mining, University of Queensland, 2010), 8

Governments employ a variety of policies to stimulate local procurement, ranging from hard to soft regulations. These may translate into mandatory minimum local procurement percentages, targeted lists of goods and services, required development of local procurement plans by companies, and tax incentives.[5]  Choosing the right policy and policy tool depends on a number of factors including the country’s regulatory context, the stage of development of the project(s), and the capacity of the local supply sector to meet extractives company needs.

Local procurement policies need to consider the lead time necessary to develop competitive local industries, and to address the barriers that impede such development (knowledge, access to finance, scale, technology, etc.). Some goods and services might be available locally in the short term with minimum efforts, while others might require the building of capacity over time and sufficient volumes to be sustainable.  It is also important to recognize the distinct differences in potential for linkages that each sector and sub-sector brings.

Leading Institutions:

  • The Columbia Centre for Sustainable Investment(CCSI) conducts and applies research focused on analyzing topical policy-oriented issues and works with stakeholders to construct and implement practical investment frameworks that promote sustainable development.
  • The International Finance Corporation (IFC) provides research and works with investee companies to increase local procurement.
  • The African Minerals Development Centre provides research and advisory services to governments and finances projects aimed at increasing local manufacturing and service capacity.
  • The World Bank provides research and advisory services to governments and finances projects aimed at increasing local manufacturing and service capacity.
View footnotes

[1] See: World Gold Council’s, Responsible gold mining and value distribution report which show for 2013, 71% of in-country payments by their mining company members went to procurement: https://www.gold.org/research/responsible-gold-mining-and-value-distribution-2013-report

[2] Due to the complex value chains of oil and gas companies that often include shipping and retail activities, clear figures are not as readily available for the proportion of spending on procurement during oil and gas extraction. However, similar to mining, procurement during oil and gas extraction has the potential to be the largest single payment type. For example, BP’s operations in Angola in 2016 spent $579 million on procurement, 484 million in government payments, 137 million to employees, and 2.1 million on community investment. BP in Angola, BP in Angola Sustainability Report, (Luanda: BP in Angola, 2017)

[3] Anthea Darychuk and Dr. Karen Travers, Partnerships in Procurement: Understanding Aboriginal business engagement in the Canadian mining industry, (Mining Shared Value and Canadian Council for Aboriginal Business, 2016), 7

[4] A World Bank Study entitled Local Content Policies in the Oil and Gas Sector further elaborate specific opportunities and considerations for local purchasing at each stage of the lifecycle for the oil and gas sector. Silvana Tordo et al., Local Content Policies in the Oil and Gas Sector, (Washington, DC: The World Bank, 2013), 10-13

[5] Isabelle Ramdoo, Local content, trade and investment: Is there policy space left for linkages development in resource-rich countries?, (ECDPM, 2016), 4-6. Also, Mining IGF’s upcoming Guidance for Governments on Local Content Policies will be referenced and provides an extensive overview of the various local procurement policy provisions, including their strengths, weaknesses, and where they have been applied. Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development, Guidance for Governments on local content policies, (Winnipeg: IISD, 2018)

Key Resources

See more resources

Procuring From SMEs in Local Communities: A Good Practice Guide for the Australian Mining, Oil and Gas Sectors

This resource is one of the most significant attempts to codify local procurement issues, particularly focusing on providing extractives ...

Maximising the Contributions of Local Enterprises to the Supply Chain of Oil, Gas & Mining Projects in Low Income Countries

This resource provides guidance on maximizing the involvement of local enterprises in the project supply chain for oil, gas and mining ...

Local Content: A Guidance Document for the Oil and Gas Industry

This document offers practical advice to oil and gas resource developers regarding the potential value of local content. The resource ...

Guide to Getting Started on Local Procurement

This guide is designed to assist site operators with the creation of policies and strategies for local procurement. The guide focuses on the ...

Local Content Policies in Mineral-Rich Countries: An Overview

This resource provides an overview of local content policies across resource-rich economies worldwide. It highlights various elements ...

Local Content Development: Experiences From Oil and Gas Activities in Norway

This resource discusses industrial development connected to upstream oil and gas activities in Norway. The document provides the essential ...