Clean supply chains vital for shared value

Mines are increasingly required to implement programmes showing good practice in local procurement. International standards – as well as local policy and regulation – provide requirements and guidelines, but what really works in the field? In this series, SRK Consulting’s Lisl Pullinger and Andrew van Zyl, together with Mining Shared Value’s Jeff Geipel, explore five local procurement topics, highlighting good practice principles, providing case studies from mines and recommending practical initiatives mines can take to improve how they apply local procurement programmes. This third article focuses on ensuring exemplary supplier conduct and preventing corruption in the supply chain.

With 50% to 70% of all in-country mining- related expenditure going to procurement, it is a significant lever for local economic development. Within this context, however, the high risk of corruption in the procurement of goods and services, and problematic supplier practices, has often been overlooked.

Global industry and civil society initiatives have tended to focus on transparency in mining companies’ payment of taxes to governments, and on how governments use this revenue from mining royalties and profits. Only recently has attention been formally directed at the ways in which irregularities in the supply of goods and services could be more systematically addressed.

A recent research report from the Natural Resource Governance Institute, ‘Beneath the Surface: The Case for Oversight of Extractive Industry Suppliers’, points out that just under a trillion dollars a year is spent globally on suppliers by oil, gas and minerals companies. It warns that weak governance of suppliers can disadvantage companies, governments and host communities – through cost overruns that undermine company profits and government revenues, suboptimal taxation of supplier profits, and local procurement efforts not fully benefiting host countries or communities. A lack of transparency in procurement also raises the risk of bribery and favouritism.

Pressure on mining companies is, therefore, increasing – to ensure that their supply chains are not inadvertently supporting ‘problematic processes’ in suppliers, and that their procurement processes are not hindered by corruption.

Among the recent high-profile examples of these risks was a case involving a Canadian mining company operating in Eritrea, where a construction services supplier was alleged to be engaging in forced labour. The company, since acquired by a Chinese company, was sued in the Canadian court system. In a landmark ruling, the Canadian Supreme Court ruled the case could be heard in Canada, even though the alleged abuse took place in another country.

The case was recently settled out of court, but the strong point had been made: there is less and less tolerance for any misstep in procurement matters. There is now considerable risk to mining companies that cannot demonstrate that they have the necessary due diligence systems in place to prevent taking on suppliers that engage in corrupt dealings, for instance. Essentially, mining companies are starting to be held responsible for the behaviour of their suppliers.

It is worth remembering that the environmental, social and governance controls being applied to mines by national laws and regulations tend to view mines not as islands, but as systems with upstream and downstream linkages. These consider the streams flowing into and out of the system. Mines are having to consider how to make their procurement more transparent, and to achieve this in a systematic way that complies with both local and international requirements.

A transparent process is, of course, not just for the benefit of stakeholders, but for mines themselves – helping them to ensure that they do not pay excessive prices for goods and services. The idea behind an open and accessible procurement process is to give fair access to a wider variety of suppliers, including local businesses. Where tender procedures are unfairly restricted, this tends to raise the possibility of prices being artificially inflated – as the normal competitive principles are not followed. By following protocols that ensure an open and transparent procurement process, mines will invariably create firmer ground for good value transactions that improve commercial sustainability.

The way forward, then, is for mining companies to structure their procurement reporting according to international guidelines. The Mining Local Procurement Reporting Mechanism is a publicly available framework that several companies have recently adopted to provide this information. In addition, while procurement is not directly part of the Extractive Industries Transparency Initiative, several countries have started to request information on this topic from both mining and oil and gas companies.

In addition to mining companies being able to mitigate risks by providing more information about their procurement processes and impacts, better measurement and transparent reporting of local spending can help actors work together to increase local content – a key political issue across African mining.

Technology can also be harnessed in practical ways to improve procurement fairness; suitably automated supplier portals, for instance, can remove the ability of manual systems to subvert tender processes.

The key message is that transparency makes for cleaner supply chains, which is better for everyone. It fosters the practical application of good procurement policies and regulations, holds down mining costs, and allows the value generated by mining to be most equitably shared.