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Shared Value in Extractives and the Advantages of Local Procurement Initiatives over Traditional Community Investment

I lead a venture called Mining Shared Value, which is supported by Engineers Without Borders Canada. We work to promote local procurement by the global mining industry in order to improve the economic and social impacts of mineral extraction in developing regions.

Looking at the name of our initiative, one would guess correctly that we were excited upon the release of Extracting with Purpose: Creating Shared Value in the Oil and Gas and Mining Sectors’ Companies and Communities.

Kudos is owed to the authors for convincingly illustrating an argument that we embody in all of our work. Mining companies can create more benefits for society—as well as for themselves—by proactively working to increase local procurement, than by carrying out traditional community investment projects.

The reason we promote purchasing of goods and services by mining companies is because we are a development organization. Local procurement creates jobs, transfers technologies and builds up domestic economies in regions like Sub-Saharan Africa. Increasing local procurement by mining companies helps to contribute to economic and social development.

However, we call ourselves Mining Shared Value because local procurement also creates value for mining companies. In the long run local procurement lowers costs, increases the number of reliable suppliers available, and builds positive relationships with communities and governments.

We welcome this paper that draws on several examples from the world’s largest extractive companies to demonstrate this double benefit created when companies work with local stakeholders to increase the amount of goods and services they purchase locally.

By contrast traditional community investment programs by extractive industry companies, which see corporations stray far from their core competencies by building schools and providing health services, raise many concerns for us in their ability to create sustainable value for either party.

The Shared Value Initiative paper points out that there is little correlation between community investment spending and good relationships with nearby communities, and that the number of conflicts across extractive projects globally has actually been increasing at the same time as spending on community investment across the industry.

The record of community investment programs in terms of benefits for communities and host economies is not promising either. Critics of traditional extractive industry corporate social responsibility have long pointed out that tokenistic projects only deal with superficial problems for communities, without dealing with the root causes of underdevelopment.

The paper points out that because community investment usually responds to the loudest voices, and is short-term in thinking, projects are often not effective at creating long-term value (for a telling illustration, see this recent article about a community investment program in Ghana falling apart the moment the company and aid partner pulled funding).

We have seen examples of this dichotomy in our own work researching the local procurement efforts of mining companies.  Ashlin Ramlochan of Anglo American, stated to us that each 1% increase in local procurement by the company (approximately US$ 160M) equals over 125% of their traditional global social investment programs each year (approximately US$ 127 M). In 2013, Anglo American spent over US$ 1.63Bn on local procurement.

Furthering the point about shared value he went on to say that for them, the company found huge value in the increase in local skills created by their purchases, and the increase in reliability for their supply chain. Interestingly, he also added that local suppliers actually act as hubs for innovations that can be brought into mining operations, while the increased competition brings in lower prices and goods for the affected communities.

Companies who are leading when it comes to local procurement, like Anglo American, show that the real potential for harnessing the potential power of extractive industry activity to create development comes from local procurement, not small projects. And, the development that comes from these initiatives help the company in the long run as well.

This is not to say that companies should never provide health services, build community centres or engage in other forms of community investment. There are many cases when as much as we know that governments should be the one providing these services, that if a mining company does not provide them they simply will not exist.

However, in the long run resource rich countries like Nigeria and the Democratic Republic of Congo will only develop when their governments are accountable to their citizens, and are effective at providing public services and infrastructure.

Extractive industry companies (or international development charities for that matter)—should not replace the state. Instead, they should embrace their role as a development partner, maximizing their local procurement to increase income, taxes, skills and technology for the countries where they operate. These all help to attack the causes of underdevelopment and poverty in the first place.

Jeff Geipel is the founder and venture leader for Mining Shared Value at Engineers Without Borders Canada. This venture works to improve the development impacts of mineral extraction in developing countries through encouraging an increase in local procurement by mining companies.