Venture Report: The Merits and ​Pitfalls of ​Local ​​Procurement ​Regulations for ​the Mining ​Sector

At the Mining Shared Value venture of EWB, we are working to improve the development impacts of mineral extraction in host countries by increasing the amount of goods and services purchased by mining companies.

Governments in sub-Saharan Africa and other regions are striving to ensure more of the potential economic benefits from mining stay within the borders of host countries. One of the common outcomes of what is termed “the resource curse”—where countries with high production of extractive industry resources paradoxically have worse development outcomes than those without—is that mining operations use little locally produced and supplied goods and services.

In response, many countries have begun to use regulations requiring investing mining companies to purchase goods and services locally. With governments feeling pressure to demonstrate more benefits from mineral extraction, the question is less if local procurement regulations will be introduced by governments, and more so when and how these regulations will be developed.

However, despite the increased use of regulations to pressure more purchasing of goods and services, there has been little in the way of research on the outcomes of these rules. Due to this, the Mining Shared Value venture is excited to release The Relationship Between Local Procurement Strategies of Mining Companies & Their Regulatory Environments: A Comparison of South Africa and Namibia. This report examines the relationship between local procurement regulations and mining company practices in the South African and Namibian mining sectors.

This study is in collaboration with the Canadian International Resources and Development Institute (CIRDI), with contributions from Sustainable Economic Futures (SEF) Canada and the Norman B. Keevil Institute of Mining Engineering at the University of British Columbia.

It is hoped that this report will contribute to addressing the gap in empirical evidence on how mining companies engage with regulations requiring local procurement, in order to inform both the governments of South Africa and Namibia, as well as other countries considering their own regulations on mining local procurement.

Our study shows that:

• Local procurement regulations are increasing attention to local procurement, particularly when comparing company reporting in South Africa and Namibia. This is not to say that regulations requiring local procurement are the only cause of increased attention to the issue, but the data from this research does show more activity on behalf of mining companies in South Africa than on Namibia.
• There are many other influences on company behaviour – and many of them are in fact more impactful than regulation in terms of pressuring companies to buy locally (community pressure for example).
• While many companies engage in supplier development efforts in both countries, there is a general feeling of a lack of resources for these efforts, as well as tension over who should be responsible for building the capacity of domestic firms. There is a feeling that requirements to purchase locally need to be matched by comprehensive support systems and resources to build and enhance supplier capacity.
• The focus on the nature of supplier ownership in regulations in South Africa, and in those under consideration in Namibia, is not always well aligned with the ultimate goals of industrial growth in each country. In focusing so strictly on the nature of ownership of businesses, many mining companies feel that this is having an unintentional effect of hurting potential for industrial upgrading.
• While this study did not carry out a full political economy analysis of mining local content regulations in South Africa, interviews revealed a significant level of concern over the potential of regulations to be misused in South Africa to benefit politically connected elites.

This report recommends that:

• Regulatory frameworks and their related targets need to be based on a deep understanding of the needs and opportunities that exist.
• A sector-wide initiative is needed to buttress regulations requiring local procurement with significant support for suppliers.
• Mining companies will require partnership with other actors including government, industry associations and civil society. Such multi-stakeholder approaches in both countries would benefit greatly from a clear strategy that assigns roles and responsibilities to each actor, to improve both accountability and ease tensions.
• Beyond regulatory approaches, there are many non-regulatory approaches and programs that can help mining companies purchase more local goods and services.

The key messages from our study are that targets in regulation related to local procurement need to be matched with adequate support programs and resources to ensure that suppliers have sufficient capabilities to meet the demands of the mining companies, and regulators need to carefully consider the unintended consequences of regulations that may actually be unaligned with the goals of industrial upgrading.

Emily Nickerson
Program Manager, Mining Shared Value
Engineers Without Borders Canada
+1.519.803.3502
emilynickerson@ewb.ca