What gets measured gets managed: tapping into local procurement in the mining industry to advance development

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First published on OECD's Development Matters site on 31 January 2018

Luke Balleny

How do mining companies spend their money? If you didn’t know and listened only to the media, you might think such companies spend the most on taxes and royalties. However, you’d be wrong.

When minerals or metals are monetised, the revenue is shared between four main stakeholders in the following ways:

  1. 50–65% of mining revenue goes to operating and capital expenditure, such as the suppliers who are paid for their inputs.
  2. 15–20% goes to government, which receives its share through royalties and taxes.
  3. 15–20% goes to investors who receive profits, typically a residual after the other payments have been made.
  4. 10–20% goes to employees who are paid their wages.

A World Gold Council (WGC) study shows that out of the total annual spending in 2012 of USD 55 billion by the 15 WGC members studied, some USD 35 billion were payments to other businesses, mostly subcontracting and procurement. Less than USD 10 billion were royalty and tax payments to governments.

In Zambia, the International Council on Mining and Metals (ICMM) found that four mining companies procure an estimated USD 3 billion of goods and services each year. From this, we estimate that the industry procures about USD 1.75 billion in goods each year. Although at face value 80% of the goods are procured locally, a closer analysis reveals that 95% of these goods are not manufactured in Zambia; most are supplied by local agents that import goods from elsewhere. So 5%, or USD 87 million, represents local goods.

What does this tell us? Given the huge numbers involved, if even a small additional share of these expenditures can be captured by domestic enterprises and workers in host countries, then it can have a significant impact on local economic development and job creation.

While it may come as a disappointment to many, the fact remains that relative to the huge amount of capital required to construct and operate a mine, mining does not directly employ that many people.

Finding data on mining sector employment that are comparable across many countries is extremely difficult. However, by using ILO (International Labor Organization) data for countries in which mining could be considered a highly significant industry, direct employment lies between 0.5% and 3%. Peru (4.3%) and Mongolia (3.7%) are the countries where the mining sector contributes most to direct employment.

However, employment within the sector is not immune to some new trends affecting all industries. The digital revolution and related advances in human sciences, robotics and artificial intelligence are changing the way all businesses operate. For the mining industry, this translates into increasing digitisation and mechanisation. On the one hand, mining’s mechanisation will improve safety and environmental performance. In this changing context, the World Economic Forum estimates, for example, 1 000 lives saved in the next ten years and a reduction of 610 million tonnes of CO2 emissions over the same period. Mechanised mining will improve productivity and efficiency, and also transparency in terms of real-time monitoring. On the other hand, this new mining industry will require fewer, more highly-skilled jobs. From the perspective of poverty reduction and broad-based economic development, employment could well lose out.

That’s why as direct employment opportunities decrease, it is even more crucial that mining companies go the extra mile to increase the amount of goods and services that they procure locally to the mine site. Local procurement increases not only indirect employment opportunities in the local community, but also induced employment — the jobs created by those suppliers spending their salaries in the wider economy — thereby producing a virtuous multiplier effect.

The Local Procurement Reporting Mechanism (LPRM), a framework for reporting local procurement spend developed by Mining Shared Value and GIZ, provides a ready-made tool for companies to use so that they can measure, manage and maximise their local procurement spend. It helps to bring greater transparency to the tender process, allowing more local companies to compete for business. Companies should be proud of their efforts to procure locally, and the LPRM provides them with a means to boast about it. And of course, any mining company that has a track record of procuring locally is likely to find favour with not only a potential host government but also a potential host community.