Monica Ospina: How to create a local procurement strategy

Whether it is the cold of the Canadian north, the jungles of Africa or the deserts of Australia, a company seeking to extract minerals must develop a corporate social responsibility strategy or risk vocal and sometimes violent opposition to its plans. Creating a local procurement program is a good place to start. CMJ interviewed Monica Ospina of OTrade about how successful local procurement works and how to avoid the pitfalls. Readers should not miss her presentation to the PDAC on Monday morning, March 3.

CMJ: What are the benefits of local procurement?

Local procurement is an efficient avenue to balance the relation between the mine and community development. The benefits are two – benefits for community development and benefits for exploration/mining operation.

In the case of communities, exploration/mining operation has the power to make local economies active due to the presence of foreign investment and ongoing, in some cases, long term industrial activity. Active economies have the power to create jobs accelerate the needs for infrastructure and boost demand for local produce

In the case of exploration/mining, companies benefits start with building open and direct dialogue between the mine and local communities. This process contributes to mitigating social risk and reducing conflict between the mine and communities. In regards to the operation, benefits start from customization, quality in goods/services, on-time delivery, control of order shipment, and in the best case local procurement results in cost reduction.

CMJ: What can communities offer to the mining company?

A community's most valuable asset – regardless the level of development – is social and human capital. Communities act as local networks and avenues for development. When mining companies maintain a good relationship with communities, they open doors locally that range from a strong network of suppliers or contractors to access to political influence in the region. When working together they are partners in solving problems. When acting against each other, they are foes capable of deeply hurting each other.

CMJ: What can the mining company offer to the community?

From my personal point of view, the value of mining in the world economy lies in its ability to reach communities in most cases forgotten by their very own governments, and that brings opportunities for development. Not many industries have this chance and quite few mining companies recognize its value.

Opportunities range from knowledge transfer to building active economies. Local procurement is one of the avenues to engage and work with locals, but also there are opportunities around infrastructure, access to water and social services. There is also the opportunity of applying innovation and productivity from mining to local industries such as agriculture or manufacturing.

CMJ: What is the first step in creating a local procurement strategy?

OTrade has found that it is vital to start the process by having a professional engagement process. Most of the failures in community relations and local procurement are caused by poor communication and little understanding of communities. I have as policy to open my mind and start as a blank canvas – no preconceptions of who they are and what opportunities there might be for the community to engage with the mine.

CMJ: What is the goal of local procurement?

The goal is to build a strong network of suppliers that can branch out to meet the needs of other customers and industries, so we are able to reduce dependency in the mine and that the community’s economy stays strong even after the mine closes.

Local procurement for a mining company means they master the relationship with local communities to the point of trusting each other and being able to work as partners in a common goal – the sustainable development of the mine.

For communities, the goal is the opportunity to be active in the local economy and participate in learning, innovation, and improving production capacity and management skills.

CMJ: When is "local" not "local"?

I am glad you asked the question. As simple as it sounds, many companies don’t understand the difference. Local production and content refers to goods and services supplied or manufactured in the same place they will be consumed, used or sold. The wrong way to define "local" refers to buying goods and services produced or manufactured in a different place from where it is going to be consumed, used or sold. For example boots made in China, parts made in Germany, and batteries made in the US, mean that goods flow through the markets, reaches the community, and profit goes straight back to the country of origin, as defined by WTO as the place where goods or services were originally produced and manufactured.

The nature of the mining industry demands knowledge, experience and capacity from both local and foreign sources. Products and services used in mining include high tech equipment and new technologies. These products and services may or may not be sourced locally. It counts as "local" if the country of origin (produce and manufacture) is the same as the one where the mine operates. Or it counts as "not local" if the mine is distant from the country of origin.

With this note, I would like to make clear that the mining industry has the wonderful ability to bring together both local communities and technological advanced communities. Maximizing this way the value of trade, which is the opportunity to bring knowledge and innovation to collaboration.

CMJ: What are some challenges of a local procurement strategy?

The greatest challenge is for the mining company to educate itself about what is truly "local" and recognize how far its local procurement strategy can go. Many companies implement an uneducated buying local policy with no idea what they are doing. They simply buy in the closest town and label it as having local impact. However, this simple decision is the beginning of a big social and operational risk. Companies are perpetuating a local elite merchant class and excluding the majority of the community from the benefits. That encourages high prices that lead to inflation that distorts the local economy, making bigger the gap between rich and poor. Also, poor quality and inflated prices frequently accompany this scenario. And the company may be leaving itself open to blackmail if the community pressures it to deal solely with the merchant elite. When the benefits of local procurement are not felt across the whole community, distrust and social unrest results in blocked roads or a hostile atmosphere.

As a strategy, local procurement has to be adapted at the most local conditions of the project, social and political environment, infrastructure and the local production output.

The engagement of local stakeholders leads to increased economic activity at the local level and broadens opportunities for innovation and productivity at the local level. It also assists in mitigating social and operational risk, thus allowing mining companies to report on the positive impact of their presence as foreign investor, transfer knowledge and when managed well reduce operational and distribution costs.

Don't be mislead by big numbers. Many companies in their effort to present a greater impact to local governments show how big their numbers are when giving "local" buying figures, but those numbers might reflect inefficiencies as mentioned above. The challenge comes when asked how much of the input was produced/manufactured locally, normally the numbers tend to be small. Once again creating distrust in the mining company. Beware of big numbers that come from big contracts with large multinationals with operations and subsidiaries in the same country, or engineering and procurement contractors operating the constructi on or buying materials imported by national distributors and presented as buying from locals.

CMJ: Can you give us some successful examples of local procurement programs?

The good performance and real value of local procurement, both direct and indirect areas of influence tend to be small in numbers, long in terms of commitments, high in quality, and efficient in operation. Why small? Because the production capacity at the very local level is not always as big as the industry would like, and they tend to be small due to low population, few small businesses capable of meet the mine's demands, and economic activities in other industries (such as agriculture or manufacturing) that absorb local labour.

Sometimes, this is relatively straightforward. Working on a mining project in Mexico recently, for example, OTrade found that many men in the community had spent years working in the US on construction projects as undocumented labour.

This workforce, already trained in North American building standards and methods, formed the nucleus of a locally based building company that could meet many of the mining company’s construction needs.

CMJ: What is the ideal outcome of a local procurement strategy?

The ideal outcome of local procurement strategy is efficiency. Efficiency in managing community relations and social investment budgets where both the community and the company can measure the social return of investment. Efficiency in the operation because all goods and services sourced locally represent a guarantee of quality, customization and on-time delivery that support the industrial process.

One crucial insight developed by OTrade is that if efficiency can be seen when the mining company genuinely works on sustainable living for locals and uses local procurement as avenue for direct dialogue and engagement. Communities find in the company a partner for development; therefore, it is on its best interest to support the progress of mining as it represent the progress of all.

Please notice that I mentioned couple of times direct dialogue between companies and mining, in my practice noticed this is the more efficient way to address all sorts of issues, fears and challenges.

Monica Ospina may be contacted at 647-345-2535 or monica@OTrade.ca. Or visit Otrade.ca.