Latin American economies are heavily dependent on natural resource-based industries (NRBI). These activities, though crucial for the development of countries, are also generally subject to criticism. One concern is that natural resources are limited, and so countries should be aware of this and preemptively prepare for a “transition” into other capabilities and industries, avoiding economic over-dependence. Another concern is that there are several social and environmental sustainability issues associated with their expansion.

For these reasons -among others-, governments are actively involved in the design and implementation of strategic policies and regulations for NRBI. Firms have to comply with strict rules, particularly when it comes to their procurement decisions and the relationship with their suppliers. Because of this, some of the questions and concerns that governments have when designing public procurement laws are similar to those applied to natural resource-based industries’ procurement regulations and vice-versa.

In this blog post, we will discuss some of the findings from a recent study: “Innovation and Competitiveness in Mining Value Chains”, by Marin, Stubrin, Murguía, Carreras, and Palacin, 2021, and its implications for both supply chain and public procurement policies. 

Scope and coverage of the study

The document maps the mineral mining value chain in Argentina, identifies the different stages of the activity, its key roles and actors, explores how developed domestic suppliers are, and assesses the entry barriers and opportunities they face, as well as the role of public policy and laws. To do this, the authors interviewed and surveyed local mining firms and institutions from the exploration, construction, and operation stages of the mining value chain in Argentina. The field research was carried out during 2018-2019, adding up to almost 70 total interviews, and completing in-depth standardized questionnaires for 26 key supplier firms. Details on the selection process and the type of firms and institutions that were interviewed are thoroughly discussed in the Methodology section of the report.

The case of Argentina stands out at a first glance: a country with enormous mineral potential, but still with a small-scale non-energy mining sector (representing 0.5 percent of the country’s gross domestic product and 3.0 percent of total exports), especially when compared with its neighboring country, Chile, where mining accounts for more than half of total exports. Some of the reasons that could explain this relative under-development are explored in the study.

The mining industry has several important stages that employ a different set of resources and types of firms, and that could in principle require different regulation treatments. The document maps the main actors and endeavors undertaken in the different phases of mining activity.

The exploration stage encompasses all tasks related to identifying mineral deposits and evaluating the economic viability of their extraction. Only one supplier of goods for the exploration stage was identified, a thermal tents producer “Carpas Argentinas”. Besides that firm, no domestic companies were identified supplying sophisticated goods. On the other hand, domestic firms do provide services that are essential for this stage. Drilling is the most developed of these services. Drilling companies are typically large and own specialized machinery. Furthermore, competitive knowledge-intensive geo-hydrology analysis providers exist. However, the analysis of the subsoil samples extracted during the exploration stage is done exclusively by foreign lab subsidiaries. Since funding typically comes from international sources, the backing of internationally recognized firms is required. Domestic labs can perform most of the required analysis, but they are not recognized or certified internationally, so their results cannot be used to certify exploration results, which is an essential precondition to credibly offer and sell a project abroad.

The exploitation stage, which starts after exploration is finished, consists of all the tasks related to extracting minerals, preparing mineral concentrates,  and commercializing the final products. Local suppliers were identified in all activities of this stage, except for heavy machinery where international suppliers tend to prevail, and for some sensitive areas such as the production of cyanide and explosives where mining companies trust only global suppliers. Heavy Machinery Parts manufacturing (and repair) is the segment with the most domestic suppliers. They are mostly small and medium-size metal fabricators with long histories supplying other value chains in the country. Non-sophisticated services such as transport, accommodation and catering are also relevant, mostly in terms of direct employment, in this segment.

Main insights

It is likely that policies to support suppliers are ineffective: strong domestic suppliers that have successfully integrated into the value chain mostly took advantage of proximity and flexibility

The report identifies two types of significant barriers to entering the mining value chain: barriers related to markets and institutions and barriers related to resources and capabilities.

Despite such barriers, domestic firms that managed to enter the mining value chain did so by taking advantage of being close by and flexible. Typically, firms that are part of the mining value chain in Argentina are close to the mines and are small or medium-sized, enabling them to respond to mining company demands quickly and in some cases more cost-effectively than large multinational suppliers with headquarters in other countries. Much less common were cases of companies entering the value chain by adapting goods and services or developing completely new solutions. Moreover, only 11% of firms entered the value chain making use of supplier development policies, and when they did, they were mainly non-sustainable and non-sophisticated goods and services.

Unstable, cumbersome and non-coordinated policies are at a higher risk of failing

The study underscores the negative effect of the constant changes and opposing directions of public policy in the country. During the 1990s, a set of “mining friendly laws” gave fiscal benefits to mining firms and, most importantly, established that the government was to maintain fiscal stability for mining companies over 30 years. In 2007, however, the federal government introduced export taxes, breaking this commitment. Since then, unexpected increases and decreases in export taxes have been implemented. Likewise, the federal government has repeatedly changed the foreign exchange policy, closing and opening the possibility for companies to freely repatriate dividends.

The study further addresses the mining’s industrial policy design and it highlights a coordination problem. Mining sector laws are often overlapping and not coordinated at different governmental levels: Mining firms have to comply with specific localities requirements, provincial law, and federal law as shown in Figure 13. This requires coordination between all of the different actors, to provide a stable and understandable playing field. In Argentina, this is not the case. In the report, a thorough analysis of the frenetic and opposing changes in economic, social, and environmental policy is presented. A good illustration of this point is that COFEMIN, which aims to be the institution in charge of articulating policies between the federal government and the provinces, has been inactive through much of its existence since its creation in 1991.

In practice, provinces require mining firms to create local jobs, and to associate with local suppliers. This type of policy has generated a hostile environment and limited cooperation between provinces. For instance, firms from the oil and gas supply chain cluster in Córdoba, an argentine province that lacks mining activity, are strong in key segments like metal fabrication, but are unable to enter the mining value chain because of the added barriers of being from a “foreign” province.

To further complicate things, different unions exists at different scope levels: local-level unions near the mining facilities, provincial-level unions, and federal-level unions. Each of these, with its own set of -often conflicting- interests. Unions actively participate and have a strong effect on policymaking.

Risk of domestic supplier development programs ultimately incentivizing non-sophisticated goods and services

The study’s interviews further point at yet another problem with legislation: its focus. As previously mentioned, the most widespread policies used in the country to address the problem of entry to the mining value chain are the so-called “local content policies” implemented by each province, which require the mining firm to create -directly or indirectly- a certain number of local jobs. These policies tend to produce jobs on simple goods and services of low complexity (e.g., catering, transportation, cleaning, and laundry). Furthermore, these policies work against cooperation between provinces and ultimately against the economic development of the country, by discouraging mining firms to hire suppliers from different locations.

In addition, they are commonly promoted without enough dialog, negotiation, or planning with mining companies. This has two negative effects. On the one hand, by not engaging with the industry’s actors, policy makers are taking decisions without considering important information into account. Additionally, as a consequence of not perceiving being included in the political discussion, mining companies tend not to be committed to the policies, limiting their proper use and their impact.

If the ambition is to develop businesses that can expand beyond the local area—for example, to other provinces, diversifying, and reducing their dependence on one or two nearby mining projects—the common approaches used ought to be rethought.

Supplier development programs need to be strategically focused on activities with a clear path towards self-sustainability, and for this, dialog with the different actors involved in the activity is necessary

When designing policies to benefit a certain sector of the economy it is important to envision and clearly define a path towards economic sustainability. When it came to supplier development policies in Argentina, this was clearly not the case, and policies mostly incentivized job creation in less sophisticated activities.

Which kinds of activities have a higher chance of becoming self-sustainable, diversifying into other sectors, and integrating organically in the economy? Unfortunately, this is a hard question to answer for a policy maker on its own. This is why a participative process, involving key actors from the value chain, and also including populations that could be affected by the economic activity, as well as members of the scientific community, is necessary to design smarter strategies to achieve the intended goal.

Lesson that can be learnt relevant for public procurement

These lessons from the mining value chains in Argentina can be useful when evaluating the inclusion of secondary considerations in public procurement (PP). It is undoubtable that PP sparks great interest because of its potential to be used in an intelligent way to help to integrate certain individuals, groups, or firms into the economy. Importantly, these secondary considerations to PP would benefit from pondering about predictability and progressiveness in implementation as opposed to stark changes in policy. Furthermore, working towards clear and understandable requirements, presented in a coordinated manner among the different governmental levels might have a higher chance at success. Finally, dialog with the industry’s actors is a necessity for better informed procurement requirements. Moreover, many times governments and private firms share the same secondary goals, but the procurement design process lacks dialog and inclusion, and this might limit policy success. Working towards a higher level of inclusion of the different relevant actors in the economic activity in question could improve the effectiveness of public procurement in achieving secondary goals by better utilizing available information and by increasing commitment on behalf of firms.

Note: Work was done by Enrique Carreras and co-authors prior to the start of the SAPIENS project, and recently published by the IDB.