Backward Linkages (Supplying Extractives)
At a Glance
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Backward” (or “upstream”) linkages involve the goods and services that extractive projects procure from local suppliers for the exploration and production of mining, oil and gas projects.
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Procuring the goods and services needed to explore and extract minerals, oil and gas represents the highest in-country expenditure of many extractive projects. This can be leveraged to support the development of a local supply industry.
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Choosing the right policies and tools to stimulate local procurement depends on a number of factors, including the regulatory context, the stage of development of the projects in question, and the capacity of local suppliers to provide what extractive companies need.
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Local procurement policies need to consider the lead time necessary to develop competitive local industries, and to address barriers to that goal.
Case Studies
- New Diavik Diamond Mine 2018 Sustainable Development Report (Rio Tinto)
- Local Content Development: Experiences From Oil and Gas Activities in Norway (Per Heum)
- New Lundin Gold 2018 Sustainability Report (Lundin Gold)
- Measuring Impact Framework Case Study: Newmont Supporting Local Economic Growth in Ghana (World Business Council for Sustainable Development)
- Procuring from SMEs in Local Communities: A Good Practice Guide for the Australian Mining, Oil and Gas Sectors (Mary-Anne Barclay, David Brereton, Ana Maria Esteves, Daniel Samson)
- New Strengthening Private Sector Engagement in Oil and Gas (Extractives Baraza, Strathmore Extractives Industry Centre, African Development Bank)
Key Resources
- A Practical Guide to Increasing Mining Local Procurement in West Africa (World Bank, Kaiser Economic Development Partners)
- Maximizing the Contributions of Local Enterprises to the Supply Chain of Oil, Gas & Mining Projects in Low Income Countries (Engineers Against Poverty)
- Local Content: A Guidance Document for the Oil and Gas Industry (International Petroleum Industry Environmental Conservation Association)
- Guide to Getting Started on Local Procurement (International Finance Corporation)
- A Local Content Decision Tree for Emerging Producers (Valérie Marcel, Ekpen Omonbude, Anthony Paul, Roger Tissot)
Topic Briefing
“Backward” (or “upstream”) linkages involve the goods and services that local businesses supply to extractive projects during exploration and extraction. These inputs come from a variety of sectors and range widely in scope and type—from locally sourced janitorial services to the energy or water that a domestic utility supply. “Local” may be defined by a supplier’s proximity to the extractive operation, the nationality of a firm’s ownership, the nationality of service providers (including employees), and the degree of value added to the domestic economy, among other factors (see Defining Local ).
Developing 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. Job creation, knowledge transfer, and skill upgrading may also occur. Indeed, procurement usually represents the single largest in-country expenditure of mining operations,[1] and among the largest of oil and gas operations.[2] For companies managing extractive projects, local procurement can reduce costs over the long term, support social license to operate, , increase supply chain resilience, and reduce product delivery times. Local knowledge can reduce both costs and risks. For example, in remote areas of Canada, mining companies rely on local suppliers’ knowledge of how to operate in harsh winters as an important way to mitigate risk.[3]
Local procurement opportunities exist throughout the life of an extractive project, and proactive steps need to be taken to identify goods and services that can already be locally supplied on competitive terms, and those that could be supplied if support were provided to local firms.[4]
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Figure 1: Local procurement opportunities at different stages of an extractive project’s life cycle, 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, among other policy tools.[5] Choosing the right policy tool for the situation depends on a number of factors, including the country’s regulatory context, the project’s stage of development, and the capacity of local suppliers to meet extractive 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 (access to knowledge and financing, scale, technology, etc.). Some goods and services might be available locally in the short term, with minimum effort, while others might require building capacity over time and in sufficient volume to be sustainable. It is also important to recognize the distinct potential for linkages that each sector and subsector brings.