What’s at stake: How supplier transparency can benefit the extractive sector
A recent EITI webinar explored opportunities to promote a more systematic approach to supplier transparency.
When we think about the extractive industries, it is often large-scale mining, oil and gas companies that come to mind. The EITI has focused its transparency efforts on these companies, their ownership structures and the financial and contractual relationships between governments, state-owned enterprises and company counterparts. Relatively little attention has been given to transparency efforts relating to the industry’s supply chain, including how much is spent on suppliers, who they are, and the nature and scale of their payments to governments.
Yet speakers in a recent Transparency Matters webinar demonstrated how supplier transparency has increased trust, provided opportunities for local procurement and improved the availability of skills to promote innovation.
Starting point: A solid legal framework
Walid Nasr, Acting Chairman of the Board at the Lebanese Petroleum Administration (LPA), explained how Lebanon has established a strong legal framework as a pillar for its nascent industry, which includes integration of the EITI Standard. There is also provision for public information requests, handled through a tailored section on the LPA website.
According to Nasr, publication of the list has helped to build trust by demonstrating that suppliers are qualified and do not include owners who are politically connected. New transparency measures like these are sometimes met with skepticism by the private sector, but Nasr noted that neither the operating companies nor their suppliers have disputed the introduction of this measure.
Facilitating contractor/supplier collaboration
In the United Kingdom, the UK Oil and Gas Authority’s Energy Pathfinder portal was set up to provide visibility of upcoming project opportunities to the supply chain on the North Sea Continental Shelf.
The portal was established in 2010, when it became clear that there was a need to provide information on suppliers in one place. Project operators use the system to share public information about upcoming contracts, the latest contracts awarded and collaboration opportunities. This means that suppliers have better awareness of procurement opportunities and how to apply for them. Details about the points of contact for each contract also provide businesses with information on who to follow up with for subcontracting opportunities. There are now more than 1,000 subscribers using the system and over 130 project opportunities. The platform has been revamped to meet the extended needs of the industry, including the need to unlock stranded projects. It has created a forum to promote innovation by allowing contractors to connect seamlessly with suppliers and providing publicly accessible information on the supply of goods and services in the North Sea.
Beyond compliance: Exploring local procurement and emissions reporting
In the mining sector, there is also scope for supplier transparency to play a role in helping companies improve transparency and comply with regulation. “We are starting to see legislation taking supplier transparency further, requiring companies to understand who they are doing business with that business partners are meeting their values,” explained Daniel Driscoll, Vice President, Legal and Compliance at Endeavour Mining, a company with gold mining operations in West Africa. “Third-party screening is now more regularly part of compliance frameworks and good process can be a competitive advantage.”
Driscoll highlighted opportunities relating to both local procurement and emissions reporting. The development and use of local supply chains is an important policy objective in many resource-producing countries. It requires clear and agreed frameworks that governments and companies respect.
Endeavor is implementing the Mining Local Procurement Reporting Mechanism, a set of disclosures which seeks to standardise how the global mining industry and host countries measure and talk about local procurement. This reporting aims to strengthen the social license to operate by improving internal management surrounding procurement, empowering suppliers to collaborate with mining industry and by increasing transparency to fight corruption.
Supplier emissions are an important part of the scope 3 emissions produced by many companies, including those in the extractive sector. Monitoring and reporting on these are therefore key for companies to achieve their emissions reduction goals. Moreover, as the energy transition reshapes oil, gas and mining, information on how extractives companies engage with local and international suppliers will help governments and the private sector plan for the changes that lie ahead.
Recent research from the NRGI has shown that the scale of supplier spending is significant. It is estimated at as much as USD 1 trillion per year, amounting to approximately two-thirds of expenditure by companies.
One of the report’s authors, Robert Pitman, emphasised that “the scale of this spending means that decisions relating to supply chain management affect how much profit and taxable income projects generate and provide an important opportunity for countries to build local content. Unfortunately, they can also open the door for corrupt interests to profit.” Pitman concluded that more transparency is needed, noting that few governments and companies currently publish anything like systematic information on suppliers. But he is optimistic about the future, flagging that “some companies and governments recognise this issue and are taking steps in the right direction.”
Ines Marques, EITI’s Policy Director, outlined how the EITI could take forward its work in a way that would bring together opportunities and standardise reporting to improve supplier governance. Guinea, Mali, Senegal and Tanzania are some of EITI implementing countries currently reporting on suppliers, including information on how much companies spend on subcontracting, how much local content is present in supply chains, who ultimately owns supplier companies and how much these companies are paying in tax.
These disclosures are not required by the EITI Standard, but work on supplier transparency has been undertaken by these countries because it contributes to achieving national priorities. Going forward, the EITI will build on these examples with the international community, by convening discussions on key issues such as procurement rules and processes, supplier identities and local procurement and spending.