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Backward Linkages (Supplying Extractives)

At a Glance
  • 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.

  • 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.

  • 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.

  • Local procurement policies need to consider the lead time necessary to develop competitive local industries, and to address barriers to that goal.

Case Studies

Key Resources

See more resources

Doing Business 2018, Reforming to Create Jobs

This report offers quantitative indicators on business regulation and the protection of property rights. Organized along a number of simple ...

A Local Content Decision Tree for Emerging Producers

This document provides a basic roadmap to simplify the complex considerations that come into play when designing local content oil and gas ...

New Diavik Diamond Mine 2018 Sustainable Development Report

Rio Tinto’s 2018 Sustainability report for the Diavik mine in the North West Territories of Canada provides an example of how a mine ...

New Lundin Gold 2018 Sustainability Report

This sustainability report from Lundin gold demonstrates how local procurement spend can be shared with communities and stakeholders. For ...

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 ).

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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] 

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 countrys 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.

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[1] In 2013, 71 percent of in-country payments mining company members of the World Gold Council made went to procurement. World Gold Council, Responsible Gold Mining and Value Distribution: A Global Assessment of the Economic Value Created and Distributed by Members of the World Gold Council (London, UK: World Gold Council, 2013), https://www.gold.org/research/responsible-gold-mining-and-value-distribution-2013-report.

[2] Since the complex value chains of oil and gas companies 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. Looking at individual examples, however, indicates that procurement takes up a lion’s share of in-country investment. For example, to support its operations in Angola in 2016, BP spent US$579 million on procurement, US$484 million in government payments, US$137 million to employees, and US$2.1 million on community investment. BP in Angola Sustainability Report (Luanda: BP in Angola, 2017).

[3] Anthea Darychuk and 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 further elaborates specific opportunities and considerations for local purchasing at each stage of the life cycle in the oil and gas sector. See Silvana Tordo et al., Local Content Policies in the Oil and Gas Sector (Washington, DC: World Bank, 2013), 1013.

[5] Isabelle Ramdoo, Local Content, Trade and Investment: Is There Policy Space Left for Linkages Development in Resource-Rich Countries? Discussion Paper No. 205, European Centre for Development Policy Management, Maastricht, 2016, 4 Also, Mining Intergovernmental Forum’s (IGFs) Guidance for Governments on Local Content Policies (Winnipeg: International Institute for Sustainable Development, 2018) provides an extensive overview of the various local procurement policy provisions, including their strengths, weaknesses, and where they have been applied.