Issue No. 32, February 2015
Local Content in Mining: Increasing Expectations and Potential Solutions
Local content1 in the extractives industry involves trade-offs that are increasingly important for host governments, communities, and companies to acknowledge and address. In particular, local content:
- Has the potential to promote substantial local economic development while also testing the boundaries of “resource nationalism” and protectionism.2
- Is often managed within companies by global procurement or supply chain departments while its benefits are most frequently championed by community relations practitioners and others pursuing social license on the ground.
- Has staying power and scale only to the extent that the “right” incentives exist for collaboration within and between the public and private sectors.
- May offer the most direct channel to achieving both legal and social license (e.g. demonstration of benefits that ultimately reduce community-level risk), but also runs the risk of creating dependence on the company or capital project.
Within the extractives industry, local content has been more heavily regulated in the oil/gas sector than in mining (where it has always been a significant social license issue, particular in the area of local employment). However, this situation is changing as a) host governments recognize the economic impact that mining projects have on the national and local economies; and b) mining is deploying increasingly sophisticated technical solutions that may reduce the scale of workforce requirements as well as up the ante for higher skilled workers (who are harder to find locally).
Given these trends as well as increasing social license and government expectations on demonstrating local benefits and providing shared value (particularly in periods of low commodity prices and corresponding reductions in public sector “take” from taxes and royalties), there are a number of available best practices to consider in developing an effective local content strategy:
- Systematic approaches that start early and are refreshed in anticipation of lifecycle transitions: From exploration to feasibility, through to construction, operations, and mine closure, timely local content planning is essential for reducing social risk. Some extractive companies now require local content plans at every stage of capital project approval as well as at critical milestones throughout the overall life cycle.
- Consideration of tendering and contracting tactics to increase access for local suppliers: A broad range of tactics, such as unbundling of large scale engineering packages, contract reservations, and modifications in procurement policy in favor of local suppliers can be carefully (e.g. importance of maintaining integrity of process and transparency) deployed to increase local content contributions.3
- Integration of complementary approaches across social investment, local workforce, and local supplier development: Training, small and medium-size enterprise (SME) development, livelihoods support, and procurement can all be joined together into an integrated local content strategy that optimizes company efficiency and maximizes external benefits. In addition, the same approaches (local capability mapping, performance criteria establishment, and third party assessments) that are used for enhancing local procurement and/or establishing realistic local content expectations within the value chain can also be used to stimulate training and SME development outside the company’s value chain.
- Proactive engagement and contractual requirements with large scale EPCs and other contractors: While competitive bidding circumstances sometimes present challenges to early collaboration, there is typically ample opportunity to signal the importance of local content within the tender documents and to set expectations regarding service provider/customer coordination on the topic once the project is underway.
- Deployment of self-sustaining solutions such as enterprise centers: Enterprise centers and other innovative approaches such as supplier clusters help to leverage beyond company-specific capacity building initiatives.4
- Multi-company and cross sector collaboration: Examples of cross-industry and multi-company collaborative efforts aimed at improving local content outcomes are increasingly evident within the extractives sector. While potentially more difficult to establish initially, these collaborative activities can help to diversify risk, spread accountability, and ease competitive pressures on limited local labor and supplier markets (by expanding supply of qualified employees and companies). 5
At Acorn International, we are dedicated to enhancing business value through excellence in environmental and social performance and are pleased to offer our services and global network of local partners to discuss your organization’s local content needs. For further information, please refer to our service offering on this important topic:
1 While local content typically refers to procurement of local goods and services, it sometimes also refers to direct employment. This note applies the broader definition.
3 Engineers Against Poverty offers a good summary of these and other tactics:http://www.engineersagainstpoverty.org/documentdownload.axd?documentresourceid=22
Issue 31 -Fast Money Beware: Non-Technical Risk Due Diligence
Issue 30 -Social and Environmental Performance - Considerations for Difficult Commodity Price Environments
Issue 29 -A Window into the Opposing View - Stakeholder Concerns about Oil and Gas in Mexico
Issue 28 -Why Non-Technical Risks Matter to the Mexican Apertura
Issue 27 -Equator Principles:Drivers of Sustainability in the Oil and Gas Industry?
Issue 26 -The Transparency Tightrope: Examining UNEP’s New Access to Information Policy
Issue 25 -July 2014: Bouston
Issue 24 - July 2014: Land Tenure and Property Rights - Where Legal Compliance May Not Be Enough
Issue 23 - May 2014: 3 Things I Learned in Mexico - Non-technical Risks in the Oil Industry
Issue 22 - April 2014: Capacity Building on Stakeholder Engagement
Issue 21 - March 2014: Above-ground Facilities and Stakeholder Engagement: Deploying the 'CAC'
Issue 20 - March 2014: A Starting Point for Shared Equity
Issue 19 - March 2014: What It Takes to Run a Great Consulting Firm
Issue 18 - February 2014: Considering Human Rights - Trends and Lessons in Oil and Gas Impact Assessments
Issue 17 - June 2013: Managing Environmental Health in International Development Projects
Issue 16 - January 2013: Integrating Environmental and Social Performance throughout the Project Lifecycle
Issue 15 - January 2013: The State of Shale Play in 2013
Issue 14 - August 2012: Building Environmental and Social Governance in Host Countries
Issue 13 - May 2012: Human Rights and Business: A New Era
Issue 12 - February 2012: Extractive Industries Confront Pressure for Greater Transparency
Issue 11 - January 2012: Key Updates to the IFC Sustainability Policy and Performance Standards
Issue 10 - June 2011: Oil & Gas and NGOs: New Rules of Engagement?
Issue 9 - February 2010: Annual Study of Sustainable Development Priorities
Issue 8 - January 2009: Annual Study of Sustainable Development Priorities
Issue 7 - May 2008: Top Ten Lessons Learned About Health Impact Assessment
Issue 6 - January 2008: Annual Study of Sustainable Development Priorities
Issue 5 - September 2007: Results of web forum with our International Partners
Issue 4 - January 2007: Annual Study of Sustainable Development Priorities
Issue 3 - May 2006: Suggestions and tips for safe international travel
Issue 2 - January 2006: Annual Study of Sustainable Development Priorities
Issue 1 - November 2005: The Top 10 “unspoken" criteria for determining the success of EIAs