Why procurement should be the "next frontier" in transparency for mining
Mine sites often spend more on obtaining goods and services – hundreds of millions of dollars a year – than anything else. Jeff Geipel says this procurement needs better data and transparency - but it has the potential to become a lever for economic and social development.
The eyes of the mining governance world were recently on the Global Conference of the Extractive Industries Transparency Initiative (EITI) in Paris (18-19 June).
The EITI system’s seminal event takes place at a major crossroads in the intersection between mining and economic development in host countries.
At the conference, the EITI formally adopted an expanded scope, requiring contract transparency, reporting on environmental impacts, as well as on employment data by extractive industry sites disaggregated by gender. Overall, natural resource governance practitioners are gradually becoming more sophisticated in understanding the types of data needed to ensure mining can work for sustainble development.
We believe that procurement should be the next frontier in transparency for mining – and oil and gas for that matter as well.
It’s not all about tax
In most cases, procurement is the single largest payment stream made by a mine site – more than payments to governments, salaries, and community investment combined. A single large-scale mine site will typically spend hundreds of millions of dollars each year on goods and services. This was the basis of my recent discussion on mining local procurement at IIED.
As shown in the World Gold Council diagram, in 2013 71% of all payments made by mine sites went to suppliers. What’s more, many countries across Africa and the developing world are adopting legal requirements for investing companies to purchase locally.
For countries and communities that host mining activity, procurement of goods and services has the potential to become a lever for economic and social development.
In our work we have seen communities transformed through capitalising on procurement opportunities – the effect of tens of millions of dollars in increased procurement on a regional economy is significant. It is an impact for which we require better management, which means we need better information.
Increasing transparency in procurement for sustainable development
MSV has been doing its part through the Mining Local Procurement Reporting Mechanism (LPRM), which was commissioned by GIZ GmbH’s extractives and development sector programme. Launched in July 2017, the LPRM is a set of publicly available disclosures that we hope emerge as best practice for the mining industry.
We’ve learned that when mine sites collect and share more information on local procurement efforts and results, it:
- Empowers host country suppliers, government, citizens and other stakeholders to help local businesses capitalise on supply opportunities
- Helps deter corruption by shedding light to the procurement processes, and
- Improves internal management of the issue by the mine site.
Learning from "success” – the Oyu Tolgoi mine
MSV is working with the mining industry to encourage companies to improve their reporting towards full accordance with the LPRM. We are also working with partners across Africa and Asia to support multi-stakeholder programmes to use the LPRM.
Given the increasing attention from governments on this issue, using the LPRM offers mine sites a way to provide information to help better policy formation.
The website of the Oyu Tolgoi mine site in Mongolia provides an example of what the LPRM can look like in practice, by giving local businesses easy access to information on how to supply to them.
Oyu Tolgoi provides an incredible level of detail on the practical means of supplying the mine. Contact information, details of upcoming supplier trainings, and codes of conduct are just a few of the practical pieces of information provided. The procurement section of Oyu Tolgoi’s website provides current and potential suppliers of the mine with all the practical information necessary to engage with the procurement process. This level of information sharing is rare in the industry.
What’s more, Oyu Tolgoi clearly shows where its local procurement spending goes. It is also the first mine site in the world to both:
- Break down 'in-country' suppliers into those who are fully Mongolian and those who are branch operations, to better track and target spending on suppliers that create the most in-country value, and
- Break down spending into broad categories of goods and services, allowing suppliers in Mongolia to understand what the real opportunities are for supplying – and as importantly, what are not.
The Oyu Tolgoi case study (PDF) shows that the mining company itself benefits from disclosure. Empowering local suppliers helps lower procurement costs over the mine’s very long life, and open information helps set expectations and build trust with local stakeholders.
Building on this positive example, we hope that large-scale mine sites will adopt the LPRM to ensure mining activity creates meaningful economic and social benefits for host countries.
Of course, this is not to say that mining is a guaranteed route to sustainable development – and in some places the challenges outweigh the benefits.
But for the countries and communities that do choose to pursue and host mining sector activity, we should do everything we can to multiply the sustainable development effects, starting with transparency around local procurement.