The LION Programme: Progress Through Procurement | Nils Handler

Not a mineral producing nation per se, Germany is a fundamental player in international cooperation in the extractives sector.  Consolidating this position, the German Federal Institute for Geoscience and Natural Resources (BGR) has launched the LION programme, seeking to improve local procurement in the mining supply chain.

To understand the programme's goals and progress, we talk to Nils Handler, Policy Advisor with BGR and Project Manager of LION.  


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With support from the German Federal Ministry for Economic Cooperation and Development, through BGR, and the Inter-American Development Bank.

Transcript

Åsa Borssén: 
Germany is a key player in international cooperation in the extractives. Through its implementing agency BGR, they have launched the LION programme - a project aiming to improve local procurement in the mining supply chain. What will it take to make the LION roar? I am your host Åsa Borssén, and this is Highgrade.

Welcome to this Natural Resources Podcast. I am here with Nils Handler, policy advisor with BGR and project manager of LION. Nils, welcome, and thank you for joining us today.

Nils Handler: 
Thanks so much for having me.

Åsa Borssén: 
Now, most people don't associate Germany with mining, yet Germany has an extensive agenda on international cooperation in mining. Why is that?

Nils Handler:
You’re actually not the first person to ask me that. So I actually think that in most of the partner countries, the extractive sector is we need playing a key role in their economy. So it's an important source of tax income and has huge potential for economic development in general. So from the German perspective, why does this matter to us? It's because our industry and economy are so highly dependent on natural resources. So the lion share of raw materials is imported and neither extracted in Germany nor in Europe. Actually, if you think of the global energy transition, all of these trends sort of increase the demand for certain raw materials such as copper and cobalt. Many of these, if not most, are located in developing countries with pressing developmental needs. And German Development Cooperation is taken on the responsibility of making supply chains more responsible.

Åsa Borssén: 
There are different potential themes for mining programmes in international cooperation, and examples will be local skills or multi-user infrastructure, but your programme “Extractives and Development” has an emphasis on local procurement. Why is it, and you already touched upon it but if we could elaborate a little bit, why is local procurement so important in a development context?

Nils Handler: 
Germany is really trying to establish an economic partnership with Africa. So initiatives such as the Compact with Africa, which is basically, if you're not familiar with it, it's based on the Marshall Plan that rebuilt Germany in the 1950s. And I think it's a very good narrative that, you know, aligns well with a lot of German people, ideally, also with our partners in Africa. Now in German development cooperation, we're really focusing on the role of the private sector and economic development. A lot of emphasis has been given to governance and transparency in the last commodity boom, so around 2009. But we really believe that local economic development industrial linkages, to and from the mining sector, are now at the forefront of the political agenda and will be central to German development cooperation in the extractive sector in years to come.

Åsa Borssén:  
And how does procurement serve the broader local content agenda?

Nils Handler: 
So in our sector programme, we've developed what's called the LION tool, and it is providing much needed empirical evidence for policymakers. So basically, if you don't know much about what's going on your sector, where you can focus local procurement initiatives, it tells you where are the big ticket items in the mining procurement, and it also puts a price tag on them. So it basically tells you how big a particular procurement opportunity is. So for example, it tells you that if you want to tackle local procurement effectively you should focus on energy supply instead of local catering. And you know that because our LION tool tells you the exact value of each of these procurement categories, and that sort of translates into the total opportunity that you have for local value creation.

Åsa Borssén:
So it's about gathering data and on which level do you gather data? Is it on a mind site level? Is it on regional level, national level?

Nils Handler:  
So it's on national level. We are aggregating data from different from different mines, but we want to show the total opportunity at a national level. Still, you know, you can access the tool and see that we have sort of data on individual mines as well. But these procurement categories we aggregate at a national level. It can also tell you that, overall, for example, in West African gold mining, you have a procurement spend of around 2.5 billion US dollars per year, and even more than twice that number so around five to 6 billion per year in the Copper Belt, so that is Zambia and the DRC. And the reason why these figures are so important, because nobody really knew them before we put them out there. In terms of its these are fragile, and environments and statistics are not really reliable or robust.

Åsa Borssén: 
And who is the beneficiary? Is it a tool for government? Or is it a tool primarily for private sector or local enterprises? Who will use this LION tool?

Nils Handler: 
Basically, I mean, really all of the above, right. So if you want to promote local procurement, the question is, where do you focus your energy? And if you are a mining CEO, for example, if you want to ensure your social licence to operate, you can also think of where are those supply opportunities where it actually makes most economic sense to think of a viable solution both for the local community as well as the mining company? And lastly, if you're a local supplier, you know, you can access this tool online and look at what is the total market size which you might produce for in a given context.

Åsa Borssén: 
And you mentioned two regions in Africa. Is the programme geographically specific? Or could this programme be used and replicated in other places, say Latin America?

Nils Handler: 
So great question. It's actually a question we've been pondering as well, in the sense of, we've been initially developing the programme in West Africa. But now that sort of we've actually produced these numbers in two different contexts, we are actually thinking about potentially extending it to Latin America, which has a lot of the same minerals that we already have some experience with. So I don't want to give away any sort of countries or localities at this point, but it's definitely a direction that we're thinking in.

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If you just tuned in, this is Highgrade’s Natural Resources podcast, and today we're speaking with Nils Handler about LION, a BGR programme to help assess market potential in the mining sector, at a national and regional level.

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Åsa Borssén: 
To capture scale economics and mining multinationals, they try to centralise big purchases, so called Global procurement. In the face of this, what incentives do companies have to procure locally?

Nils Handler: 
It’s a very good question. Because obviously, the business case always has to be there, right? Specially to incentivize companies to do something. From all I know, if there's one thing that's always on the top of the minds of mining CEOs, these days, it's the social licence to operate. And I really think that by procuring from local suppliers, the mining companies can really contribute to sustainable development and their relationship with the local community. And therefore, you know, make a dent into really enhancing their social licence to operate in the in the context that they're operating in. But also, contrary sort of, to the logic of procuring everything globally, you can also lower your supply chain risk to really make sure that ways are shorter, you're not as vulnerable to logistical disruptions, you know, which we are seeing a gigantic one right now with the pandemic. And you can also reduce sort of transport and, and logistical costs and waiting times once you've really sort of developed and established a local supply base, so I think it takes a bit of time, but then eventually, once you've you know, established good relationship with local suppliers they might also be more flexible in delivering goods.

Åsa Borssén: 
And we can’t be having this conversation without going into the somewhat contentious question of what is local? How do you define local in this project?

Nils Handler: 
What we are really hoping for which we consider actually sort of like the ideal case is if you not only have a local owner of a company, but if you create the value locally. So what that basically means is you're not just for example, importing a partner, but you're actually producing it. That obviously is increasingly difficult the more technologically advanced the product is. But that ideally, would be the best-case scenario to really create this local value added that that we are after and that we're trying to promote.

Åsa Borssén: 
In policy, there's often a need to balance long term objectives with short term urgencies. What are some of the real-life challenges of implementing the LION programme on the ground?

Nils Handler:  
I really believe like, especially in the African context, most of these discussions around local content are still incipient in nature, they're really still very early stage. And, you know, while we sort of put these numbers out for the huge potential that local value addition can potentially create. A lot of policymakers are really stumbling over these pitfalls. So, for example, just in the definition of what is local, which, you know, you just touched upon, because if you get that wrong, then you might, on paper, get an impact of what you're trying to achieve but it's really not there, you know. And that's why I think, sort of like this advisory work that we do, is important, because otherwise, people based on the potential they see on trying to implement something to unlock this potential, but they're not really getting what they're after. One way you can really create an incentive for local policymakers to start moving and get traction is just show that other countries which have done something in in a really good way. So you might know that Norway, for example, in in the oil and gas sector, used to have a local content policy, which eventually they just phased out. And why is it that the case? Because buying local was just a natural decision for the companies there because prices and products had become competitive.

Åsa Borssén: 
And the mining industry is going through big changes, automation and digitization. In your view, will these trends, reduce or improve opportunities for local procurement?

Nils Handler: 
That is really a great question. And thanks for addressing sort of this elephant in the room. So some brilliant economists, such as Daron Acemoglu, are working on these questions, and what the implications are for the social contract. Because I believe the social contract in the end is sort of, you know, you have a very powerful sector, but it also has to get benefits, tangible benefits for the local communities. And so I believe that the numbers that are out there are really stark and indicate that there's most certainly going to be a substantial loss in local labour for mining operations. And this is actually mostly going to be the case for countries where there are new mines being built. So for example, in Mali. Whereas if you compare that to mines in South Africa, for example, which have been long established, there's much more of a legacy, you know, there's like, local labour representation is much stronger, and they cannot be as easily retrofitted. And so what does this tell us for the work that we do? I really think that indirect employment in procurement is going to become ever more important to secure the social licence operate that mining CEOs care about so much. Automation is going to reduce the number of people which are directly working in the mine right. So like directly, and labouring in the shafts, but sort of this whole ecosystem around the mine. So, you know, the possibly the local catering, electricity generation, mining spare parts, producing steel balls, producing health and safety equipment, these kinds of activities are going to increase in importance. And these actually correspond with categories that we show in our LION opportunities that we identify. So I really think that mining companies and policymakers should try to focus on sort of these indirect and induced jobs that result from the mining company in order to, you know, keep the social contract intact, and to ensure the social licence to operate.

Åsa Borssén: 
And looking more to today, COVID has changed the world. How is this pandemic impacting your programme?

Nils Handler: 
In the short term, I really think that it creates a lot of uncertainty. So you have hugely globalised value chains. And these are just going to take a hit from all this uncertainty. So there are a lot of, you know, orders that that saying there are logistical interruptions. So, think of just medication just not being able to get delivered from China to Europe, for example. And also, if you're like a local producer in, let's say, a developing country, you can even sell your products to other international markets. So I just think there's a lot of actually just foregone economic activity in the short term. And yet, like in the medium and long term, we really have to wait and see what the turnout is going to be. I believe I already mentioned that I sort of my feeling is that a lot of companies are going to re-evaluate the risks of international supply change, and even might be able to willing to pay a premium to procure locally because it means there's a higher security of the supply and therefore a diminished risk of all these interruptions, which we now see going on everywhere.

Åsa Borssén: 
Nils, thank you very much for joining us today.

Nils Handler:  
Thanks.

Åsa Borssén:  
And thank you for listening. My takeaway from this conversation: local linkages are gaining momentum in the extractives industry. As trends such as global procurement and digitalization become more prevalent, local content and indirect employment will be key to secure a social licence. Like many of us in the industry, I will be closely watching how BGRs LION programme can help tackling this challenge around the world. 

This podcast was done with support from the German Federal Ministry for Economic Cooperation and Development and the Inter-American Development Bank. If you liked this conversation, you can subscribe to our podcast channel and be the first to hear about new releases. We will be back soon. Until then, so long.