Access to Finance
At a Glance
Access to finance is an important element of expanding the capacity of local supply chains.
Efforts to address suppliers’ access to finance may be coordinated by the extractive industry itself or included in government policies to foster local procurement. International financial institutions also have a role to play.
A first step is to understand the factors that affect local firms’ ability to access both extractive industry procurement contracts and to finance.
To determine the most suitable ways to boost local suppliers’ access to finance, extractive companies and policy makers must also consider factors such as market distortion and the risk of dependency; also, they should avoid the duplication of institutions or services.
To expand their capacity, local suppliers require adequate access to finance. Governments and the extractive industry itself can improve suppliers’ access to finance in many ways. International financial institutions also have a role to play. The first step of any effort in this direction is to understand suppliers’ specific financing challenges and needs, as well as the for local suppliers the first step is to understand their challenges and needs, and obstacles that affect their ability to access extractive industry procurement contracts.
The IFC’s Guide to Getting Started on Local Procurement highlights two key questions to address:
- How well does the local banking market support small and medium-sized enterprises (SMEs)?
- Is there a level playing field for local and international suppliers when it comes to value-added tax, import duty exemptions, and other similar mechanisms?
Ways to address local suppliers’ access to finance include the following:
- Extractive companies may provide direct loans and financing to local businesses. These can take a variety of forms, depending on the needs of suppliers and buyers. Examples include loans for purchasing the equipment necessary to meet a buyer’s requirements, loans for working capital, and small loans granted as part of a capacity development program. Loans could be guaranteed by contracts awarded to the supplier, or be standalone loans with a financing fee.For example, the Anglo-American Zimele Supply Chain Fund in South Africa provides equity and loan financing of up to R5 million (~$500,000 CAD) per project. Evaluation criteria and application processes for the fund can be found here.
- Extractive companies can facilitate financing to suppliers. For example, they can adapt their payment structures to support suppliers (such as by paying suppliers before the good or service is delivered; or using a shorter pay cycle than the procurement department typically offers; or offering cash advances of a specific dollar amount or as a percentage of the contract size). These mechanisms all work to address the problem of suppliers not having enough cash flow to take and deliver on a contract. For example, the Newmont Mining
Ahafo Linkages Program in Ghana works to identify the financing needs of SMEs early on in the process, and to accelerate payment processing.
Extractive companies can help suppliers obtain financing from financial institutions. This can be as simple as an extractive company introducing a supplier to a financial institution or a local, regional, or national entrepreneurial finance provider, or it could involve an extractive company co-signing a bank loan, based on the guaranteed work outlined in the contract. These guarantees can be an effective way to address local businesses’ lack of access to financing, particularly for medium- to long-term projects.
- Financial institutions can partner with extractive companies to help local suppliers. They may sign a memorandum of understanding or develop context-specific financial products. Examples include Lonmin, which signed a memorandum of understanding with South Africa’s biggest bank, Absa, and the IFC to give suppliers up to R100 million (approximately CAD 10million CAD); Anglo Brazil’s PROMOVA supplier development program offers options for suppliers to get better interest rates, among other perks, from banks with which Anglo American has a commercial relationship.; Guinea, Rio Tinto has partnered with Guinea Alumina Corporation (GAC), IFC, and BICIGUI, the local banking affiliate of BNP Paribas, to offer over 100 local SMEs with training in business plan development and access to financing.
- Development institutions, either alone or in partnership with extractive companies, providing financing to local suppliers. For example, 3FP (a building markets program) and IFC work with various stakeholders in Liberia to improve local suppliers’ affordable access to business finance by providing guarantees, advocating for regulatory change around equipment leasing, and supporting the development of new business finance products. The Copperbelt SME Suppliers Development Program in Zambia includes an industry committee that addresses the financing of suppliers by involving banks in the cofounding of local entrepreneurs and SMEs.
To determine the most suitable approach to context-specific needs, extractive companies and buyers must also consider these factors:
- Market distortion—does the selected approach have the potential to distort existing financial markets in the short or long term?
- Dependency—does the selected approach promote the dependency of suppliers, financial markets, governments, or other actors on the extractive company in any way over the short or long term? What will happen when the extractive company leaves and no longer provides, facilitates, or coordinates a specific financial service? If there are certain dependency risks in the short term, how can they be addressed in the long term?
- Duplicating institutions or services—does the selected approach duplicate the service offerings of any existing institutions? If yes, why was this approach selected instead of the services of an existing institution being reinforced?
 International Finance Cooperation (IFC), A Guide to Getting Started in Local Procurement (Washington, DC: IFC, 2011), 37.
 IFC, A Guide to Getting Started, 53.
 Michael Baxter and Lindsey Allwright, Opportunities to Improve Financial Inclusion in Mozambique: Building on Investments and Economic Activities Associated with the Extractives Sector (Financial Sector Deepening Moçambique, 2015), 20.
 Matthew Hill, “Lonmin, IFC Sign Agreement with Absa to Improve BEE Suppliers’ Access to Finance,” Mining Weekly, May 5, 2008.
 IFC, “Bridging the Gap between Small Businesses and Mining Companies to Increase Local Impact in Guinea,” Small and Medium Enterprises: Stories of Impact, IFC Solutions, IFC, Washington, DC, 2013, 1.
 World Bank Group and Kaiser Economic Development Partners, A Practical Guide to Increasing Mining Local Procurement in West Africa (Washington, DC: World Bank Group, 2015), 45.
 Baxter and Allwright, Opportunities to Improve Financial Inclusion in Mozambique, 20.