Does local procurement regulation in mining work?

Does local procurement regulation in mining work?

Through engagement with the mining industry in South Africa where there are stringent local procurement regulations, and in Namibia where there are not, a number of key insights emerged that policymakers in both countries and beyond can utilize in their efforts to increase economic benefits from mining.

Performance of local procurement regulation in the mining sector to increase local purchasing of goods and services: The data presented in this study suggests that local procurement regulation is increasing attention to local procurement, particularly when comparing company reporting in South Africa and Namibia. While the sample sizes of companies in both countries were limited, the levels of reporting on local procurement in South Africa by the mining industry compared to Namibia, as well as self-reported figures of local spending, demonstrates there is more emphasis on local procurement as a practice in South Africa. 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 a wide variety of incentives for mining local procurement that exist independent of regulation that merit more attention: Interviews and field research provided insights on the reasoning for mining company efforts to attempt to purchase goods and services locally. While this research suggests that South Africa’s regulations are indeed pushing increased local procurement, there are many other influences on company behaviour – and many of them are more impactful than regulation. The desire to keep host communities supportive of their operations was cited in most cases as a major driver of company action to attempt to buy locally. In addition, lowering supply chain costs in the long run was also a driver of action to help local suppliers. Figure 17 below illustrates the various types of incentives found to be affecting mining companies in both countries, independent of regulation.

Regulations without comprehensive capacity-building support for existing and potential suppliers is leading to unrealized adding to unrealized potential and tension: While virtually all mining company representatives interviewed expressed a desire to purchase as many goods and services locally as possible, concerns over the ability of local and national suppliers to meet their needs were wide spread.

While many companies engage in supplier development efforts there is a general feeling of lack of resources for these efforts, as well as tension over who should be responsible for building the capacity for domestic firms. There is a feeling that requirements to purchase locally need to be matched by comprehensive support systems and resources for the suppliers companies are required to purchase from.

Economic empowerment laws are not necessarily in line with industry growth goals in both countries: 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 company buyers feel that this is having an unintentional effect of hurting potential for industrial upgrading. Interviewed companies reported the focus on ownership is leading to:

a. Cases where suppliers scale too quickly. There were many instances described where mining companies artificially propped up suppliers (with various forms of resources) to meet regulatory requirements.

b. An overemphasis on low-value products that match current skill sets. There is an emphasis on ownership without sufficient parallel investment capacity. In general, suppliers of high-value products are lacking and there is little strategy in place to build a higher value supply base (e.g. strategy to develop specific higher value manufactured goods).

There are concerns over corruption and front companies in South African local content regulations: 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.

Conclusion and Recommendations
The research carried out shows that while there are significant challenges in both country’s efforts to increase local procurement in mining, there are a number of opportunities for host country governments to support current and future approaches. In the case of South Africa, the recommendations offer opportunities to support existing regulations and ease some of the tensions surrounding them. In Namibia, these interventions should be considered as options for any future introduction of legislated requirements for mining local procurement.

Addressing the information gap: Regulatory frameworks can play a role to incentivize local procurement; however, to do this they need to be based on a deep understanding of the needs and opportunities that exist.

For example, in both countries there is industry consensus that a key supporting role that external actors, whether a government or an industry association, can play is to inform companies on what local suppliers exist.

Addressing the gap in available goods locally: A sector-wide initiative is needed to buttress regulations requiring local procurement with significant support for suppliers. There is a sentiment that ownership requirements alone are not sufficient to accomplish meaningful capacity-building and mining-based industrialization in South Africa.

Building up the capacities of suppliers and focusing on introducing new manufactured goods at competitive prices needs to be a priority. In addition to capacity building targeted at suppliers, there are significant opportunities to coordinate across mining companies to aggregate orders in a way that allows domestic suppliers to utilize on as the basis for expansion.

Defining roles of actors to increase local procurement: It is apparent that mining companies alone will have limited success in achieving broad economic benefits through local procurement and will require partnership from 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.

Harnessing non-regulatory interventions and incentives for mining local procurement: This study shows that there are many non-regulatory approaches and programs that can help mining companies purchase more local goods and services. Government creation of programs including supplier portals, capacity-building support for businesses, coordination of aggregate orders by industry and regional cooperation all offer opportunities that should not be ignored. In addition, the governments of both countries should engage with industry to better understand the non-regulatory incentives for local procurement that can be supported.

Examining and adjusting South Africa’s regulatory framework: This study has shown that there are a number of issues impeding the approach of South Africa’s government to increasing local procurement. It is recommended that the current regulations are thoroughly examined in partnership with industry to identify ways to improve the current rules to prevent unintended consequences. For example, examining and revisiting the stringent focus on the ownership of suppliers versusother potential dimensions (value addition, opportunities for capacity-building, employment generation, etc.) could identify policy adjustments that could help both government and industry goals. The Namibian government should take a similar approach to examine the effectiveness of any future regulations very shortly after they are introduced.

• This is an excerpt from the report ‘The Relationship Between Local Procurement Strategies of Mining Companies and their Regulatory Environments: A Comparison of South Africa and Namibia’, by Emily Nickerson, Jeff Geipel and Harry James. The report was presented to the Namibian Chamber of Mines this week in Windhoek and is published as part of the project by the Mining Shared Value (MSV) venture of Engineers Without Borders Canada Canadian International Resources and Development Institute (CIRDI).

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