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Using Social and Economic Impact Assessment to guide local supplier

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DOI: 10.4337/9780857932679.00035

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HANDBOOK OF RESEARCH METHODS AND APPLICATIONS IN ECONOMIC GEOGRAPHY

Using Social and Economic Impact Assessment

to guide local supplier development initiatives

Ana Maria Esteves and Galina Ivanova

Abstract

The concerted effort of companies and governments to contribute to sustainable economic

development of their communities has led to a growth in local procurement policies. Companies
wish to be seen as good citizens and to comply with government requirements. Government
seeks to maximise local benefits such as employment and strengthening local industry supply
chains. However, the evidence base for policy design is weak, and the analysis to date has
focused on some of the benefits, with little consideration of the potential adverse impacts of local
procurement or how to maximize positive impacts. This chapter considers how the potential
social and economic impacts, both positive and negative, can be predicted from the perspective
of regional sustainable development. A broad set of indicators and measures are also proposed.
The chapter demonstrates how the integration of social and economic impact assessment (SEIA)
into sourcing strategy can be an effective tool to optimise the benefits associated with
development projects to local communities. Drawing on examples in the mining, oil and gas
sectors, mainly from Australia and Canada, the main contribution lies in the application of
predictive impact assessment techniques to local procurement policies.

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Contents

1 Introduction ............................................................................................................................. 3

2 Trends in local procurement ................................................................................................... 3

3 Overview of social and economic risks and opportunities of local procurement ................... 7

4 How local procurement can contribute to sustainable regional development ........................ 9

4.1 Growth versus regional development ............................................................................... 9

4.2 Local development versus linking strategies development ............................................ 11

4.3 Importance of local initiatives in response to economic change .................................... 11

4.4 Indicators to analyse regional economies....................................................................... 12

5 Applying participatory Social and Economic Impact Assessment to local procurement ..... 17

6 SEIA methods to guide local procurement strategies ........................................................... 18

6.1 Predictive methods to assess potential social and economic impacts ............................ 18

6.2 Monitoring social and economic impacts....................................................................... 21

7 Summary ............................................................................................................................... 25

8 References ............................................................................................................................. 26

Figures

Figure 1. Matching local supply and demand ................................................................................ 7

Tables

Table 1. Baseline indicators of factors leading to successful local economic development ........ 14

Table 2. Examples of costs of local procurement and indicators ................................................. 23

Table 3. Examples of benefits of local procurement and indicators ............................................. 24

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1 Introduction
The recent resource boom in developed countries such as Australia and Canada have brought
regional development issues within resource driven communities to the fore. There are well
documented negative and positive social and economic impacts of rapid resource development
on local communities (Ivanova et al., 2007, Krogman, 2010). There is, however, little guidance
in the literature on which tools of impact assessment to use under which circumstances. This
chapter examines one area of resource activity, namely, the purchasing of goods and services by
mining, oil and gas companies in the regions and communities in which their operations are
located. Specifically, consideration is given as to the selection of impact assessment tools so that
local procurement can contribute to sustainable regional development.

The chapter suggests a broad set of indicators and assessment approaches to maximize the
positive impacts of resource development that arise from the participation of local businesses in
mining supply chains, while minimising the negative impacts. The enhanced local procurement
will help to reduce the leakages of positive social and economic impacts from the local
community. The proposed approach is underpinned by “a growing body of evidence that
demonstrates that deliberate community action can and does influence the local economy and is
capable of improving the quality of life for local residents” (Markey et al., 2005, p. xiii).

The methods outlined in this chapter seek to address the following questions:

 What are the indicators that help the community to benefit from extending its economic
diversity?
 How can resource dependent communities increase their long term sustainability, assess
and increase their capability of developing initiatives for local procurement?
 What are the indicators of local social and economic development that can be used by
resources firms in their local procurement efforts?
 How the social and economic impact assessment can be used to optimise the benefits to
local communities?

The next section provides a brief description of the trends in local procurement within the
resources industry, and is followed by a discussion of the associated social and economic risks
and opportunities. Some suggestions are offered on how local procurement interventions can be
analysed using frameworks of sustainable regional development. This is followed by an
introduction to participatory social and economic impact assessment, and an overview of
methods that can assist in predicting, assessing and monitoring local procurement interventions.

2 Trends in local procurement

Governments face a set of determining factors when wanting to capture benefits of the mining
sector and translating them into a broader socio-economic development:

 Fiscal linkages, by generating economic development through revenues collected from

the mining sector;

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  Consumption linkages, by providing a stimulus to economic development as local
workers and businesses spent their mining sector incomes in the national economy; and
 Production linkages, by supplying inputs into the mining sector (backward linkages) and
by processing commodities (forward linkages).

This paper focuses on the third factor, specifically, the creation of local benefits through supplier
linkages. The relationships connecting a mining industry with the producer firms in its supply
chain are often referred to as upstream linkages. These linkages include interactions amongst
producer firms, manufacturers, input providers, agents, distributors and providers of services.

It is broadly accepted that procuring from local small-to-medium enterprises (SMEs) can bring
significant social and economic benefits to communities. In addition to creating business for
suppliers, local procurement can stimulate economic activity and attract further investment, both
through suppliers engaging other suppliers for inputs and through the multiplier effects of
employees of local businesses spending some of their wages in their communities. Other benefits
include: improving the quality of life for employees and business owners and operators,
dissemination of new technologies and innovation to other market participants, and attraction of
investment in social infrastructure (SEAF, 2007; Esteves and Barclay, 2011).

Mining companies, however, operate in highly integrated global value chains (GVCs), in which
the local economies do not necessarily participate. This is partly explained by the existence of
higher scale economies in the production of inputs in other locations, concentration of ownership
along the chain, the level of risk and uncertainty and lack of specialised knowledge and capital in
the local economy. Firms can exploit their unique advantage of being at close proximity to the
mining project site by being part of larger competitive undertakings happening at the regional
and national levels, such as the creation of industrial parks, clusters and growth poles, or building
technological capacities and shaping governance for the upgrading of local businesses in global
value chains (Fessahaie 2011).

Much of the analysis of trends in local content in supply chains of large resources projects has
focused on national content policies implemented by national governments, in contrast with
regional or community content. Despite generally being considered incompatible with the World
Trade Organization (WTO) trade rules, through the Agreement on Trade-Related Investment
Measures (TRIMS), there is a global trend toward use of local content requirements (WBCSD
2012). Governments seek to achieve a range of objectives with these policies, such as
employment creation, development of specific sectors or industries, skills and technology
transfer, and addressing trade imbalances (WTO & UNCTAD, 2002).

In a review of empirical studies on economic effects of local content requirements since the
1960s, WTO and UNCTAD (2002) suggested that local content rules do not create sustainable
improvements in local economic conditions and can often have adverse consequences to the
country adopting the rules; and that mandated local content requirements generally have not
supported the development of competitive local industries. For instance, UNIDO (1986), in its
assessment of local content schemes across a number of developing countries, concluded that
local content schemes "were also often very costly, both in the sense of driving up local prices
and of misallocating scarce resources" (p. 75), and that local content rules have often failed to

4
contribute to technological development or trained entrepreneurs or managers, leading to poorly
managed enterprises. Further, Moran (1998) concluded from a review of the empirical literature
on local content requirements that requirements on foreign firms damage the prospects for
economic development of the country that adopts them; and lead to less efficient production and
less valuable backward linkages compared with allowing foreign firms to access global markets.
However, he also concluded that in certain sectors (such as petrochemical), the local content
requirements had played an important role in establishing backward linkages.

Local content requirements have been justified to protect infant industries until enterprises are
able to compete with outside firms. Competitiveness can be defined as the ability of a firm to
deliver orders with levels of cost, scheduling, reliability, and quality equal to, or better than,
those of its peers, and to win contracts in an open market (WBCSD 2012). While the protection
of infant industries (a theory first introduced by Hamilton (1791) ) was thought to be necessary
for countries at early stages of industrialisation if other countries are more superior in
manufacturing, early arguments were that any protection should be temporary, targeted and not
excessive (List, 1856). The infant industry argument justifies an implementation of a variety of
policies. Implementation requires progressively exposing local firms to greater competition in
order to incentivise them to improve their productivity and competitiveness (WTO and
UNCTAD 2002). The arguments against the protection of infant industries are based on
economic efficiency grounds, including the ‘picking winners’ problem and selecting second best
(inefficient) policies. For example, to apply the protection, government has to decide in advance
which industries will be profitable in future and estimate whether the benefits of protection will
be greater than the costs to consumers. The decision is complicated by political process where
the more politically powerful industries are more likely to get protected. In addition, rent seeking
behaviour of protected industries can make it difficult for the government to withdraw the
protection when (and if) the industries mature.

This chapter addresses a gap in analysis, by encouraging examination of local content from a
regional perspective without the encumbrances of regulatory prescription by national
governments. The analysis is based on an assumption that it is possible for resource developers
and local governments to design collaborative local procurement strategies so as ensure foreign
companies contribute to regional development by sourcing from local businesses. There have
been some important developments in proximity to where resources operations or projects are
located. One development has been the emergence of partnerships between governments,
industry, business associations and development aid agencies to establish supplier linkage
programs. SME linkage programs have been especially successful in enabling SMEs to access
financing and skills development programs, particularly those that provide technical mentoring
and support for the development of business management skills (Deloitte, 2004; Jenkins et al.,
2007; Nelson, 2007; Ruffing, 2006; UNCTAD, 2001). Linkage programs also focus heavily on
institutional strengthening activities to encourage an enabling environment for SME
development. One particular area of success has been in assisting women to establish their own
small businesses by providing them with access to legal, business and financial systems, thereby
reducing the gender gap that prevents many women from participating in economic life (ODI,
2005; Wise and Shtylla, 2007).

5
Corporate attitudes towards local procurement are also evolving (Esteves et al., 2010). For
example, for companies with leading practices, the drivers for local procurement have shifted
over time. In many instances, the initial motivation was a need to comply with formalised
commitments, either to a host government, an investment partner, or an Indigenous community.
Compliance was deemed necessary in order to secure access to resources. Over time, however,
these companies had become increasingly motivated by the desire to establish and maintain
enduring partnerships with local suppliers for mutual benefit.

Resource companies are now engaging in a range of local procurement interventions that are
designed to increase local business access to contract opportunities. These strategies include:
assigning higher preference weightings to local businesses in competitive bidding processes; sole
sourcing arrangements with local suppliers; price matching, that is allowing local suppliers to
match the price of other suppliers; breaking large contracts into smaller ones (unbundling) to
create opportunities for smaller local suppliers; requiring non-local suppliers to sub-contract
locally or to enter joint ventures with local suppliers; providing technical and management
training and mentoring; and linking local businesses to other service providers and agencies that
promote technological innovation and provide access to finance (Esteves et al., 2010).

In essence, current corporate practice involves a future demand analysis for goods and services
and identifying the goods and services categories with potential to be sourced locally. There are a
number of considerations that guide decisions on whether a category is a good candidate for
local procurement, such as:
 Level of risk to the business of non-supply;
 Reduced costs to be gained from geographical proximity;
 Level of technical and managerial complexity;
 Consistency of demand;
 Sustainability of demand post-closure or post-contract;
 Potential for direct job creation in the local community;
 Timeframes for when supply is required; and
 Whether commitments have been made to communities regarding certain opportunities
(such as in negotiated land access agreements).

A comprehensive mapping of local businesses is used to locate potential suppliers. An analysis

of existing capabilities within the community that are relevant to the opportunities offered by the
operations helps in identifying gaps and constraints preventing local businesses from accessing
these opportunities. The results of the demand and supply analysis are then used to guide a
strategy for the operation. The suppliers can be segmented into four categories, as shown in
Figure 1. Suppliers that have limited capacity, but meet a priority opportunity, are targeted to
participate in a supplier development program, and supported to increase their competitiveness in
global markets and qualify for contracts with other clients. Where there is little or no local
capability, and there are few demand-side opportunities, the company can firstly attempt to
unbundle the contract to increase access to work packages that do have a good ‘fit’ for local
procurement. If such opportunities do not exist, the company should consider investing in basic
entrepreneurial capability across other sectors as part of its social investment program.

6
 High
Boost
competitiveness and
(based on demand side analysis)

Develop local growth of local

Potential for local procurement

supplier capability suppliers

Source from non-

local supplier
Adapt procurement
(or unbundle work
to enable sustainable
packages which have
mutual benefits
potential for local
procurement)
Low

Low High

Capability of local suppliers

(based on supply side analysis)

Figure 1. Matching local supply and demand

Where this systematic approach was previously applied in a remote Australian context, the
following goods and services were identified as targets for local Indigenous supplier capability
development (Esteves and Barclay, 2011): artwork; biodiesel; canteen serving, clean-up and
cooking; food scraps removal/recycling; indoor plant supply and maintenance; lawn
maintenance; maintenance of personnel uniforms; plant supply; recycled soaps; and watering,
weeding, pruning.

The next section explains some social and economic risks and opportunities of local procurement
to the companies undertaking procurement and to the local economy.

3 Overview of social and economic risks and opportunities of local

procurement
Risk in local procurement is most commonly identified as a risk to the company undertaking
procurement. Risks related to local procurement tend to be attributed to the capacity and skills
constraints of local suppliers and contractors. A supply chain risk is ‘the potential occurrence of
an incident with inbound supply in which its outcomes result in a financial loss for the firm’

7
(Zsidisin et al., 2008 pp. 402-403). There has been very little written in either the academic or
the practitioner literature on the other social and economic consequences (positive or negative)
that may flow from an increase in local procurement. These consequences potentially include
(Esteves and Barclay 2011):

 demographic change associated with the ‘honey-pot’ effect created by the business
opportunities on offer and resultant in-migration;
 the concentration of economic activity around the project area;
 changes in the level of economic diversification;
 changes in patterns of land use; and
 institutional change.

There are a number of triggers leading to adverse consequences. For instance, setting
inappropriate key performance indicators (KPIs) and targets for local spend can encourage
perverse behaviour. One example of this is ‘fronting’ where companies are established with the
prescribed local ownership or address, but the decision-making and benefits are held by
individuals other than those who are not targeted beneficiaries of the local procurement policy
(Esteves and Barclay 2011). The impact on the local economy is also restricted when goods
supplied to resources companies are merely imported, repackaged and resold by local firms
(WBCSD 2012).

Another common scenario in mining communities is that, because of the high wages paid by the
large resources companies, local people are often drawn away from other businesses in town. As
a result of these losses, local communities can find their already limited services sector shrinking
even further. The loss to communities is compounded because they may also suffer a major loss
in human capital, as experienced retailers, administrators, nurses and teachers leave their
professions to work in the resources sector (Esteves and Barclay 2011).

A further example of unanticipated negative effects of local procurement strategies is community

dissatisfaction that can result from seeing only menial works being given to local people.
Community perceptions that particular groups have been favoured in the allocation of business
opportunities can negatively affect social cohesion, as can disputes within groups over the
distribution of profits and employment opportunities (Esteves and Barclay 2011).

Even for those SMEs that are part of the resource sector supply chain there can be negative
impacts, especially if the resource company is their sole, or major, client. These companies can
be left vulnerable to the business cycles of the larger company and there may be little in the way
of opportunities for diversification. Resources business cycles typically go from boom to bust
over the time frame of several years with some cycles reaching decades. The fluctuations in
international demand attribute to the severity of the cycle of the resource extractive industry. The
resulting impacts on employment, income and investments in local businesses can have a
devastating effect on the local communities heavily dependent on the industry. Some
communities located in remote areas with difficult accessibility could be especially negatively
affected.

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Before promoting the benefits of local procurement, it is important to consider these changes,
and the risk of local procurement to the local community and its social and economic
development. Tables 2 and 3 towards the end of this chapter respectively list some costs and
benefits of local procurement and their indicators.

Given the dangers of becoming a resource dependent community, it is also important to consider
the thresholds that indicate the path of non-sustainable development. This chapter advocates the
adoption of a Social and Economic Impact Assessment (SEIA) approach to local procurement
planning. SEIA can be an effective means of identifying the baseline conditions required for
sustainable local economic development, identifying the potential impacts of planned local
procurement interventions, and mitigating and managing these potential negative impacts and
enhancing the positive impacts.

The next section describes how local procurement can contribute to sustainable regional
development and suggests the range of indicators of successful regional development.

4 How local procurement can contribute to sustainable regional

development
4.1 Growth versus regional development
Economic theory suggests that growth alone can be a measure of expansion, but not sustainable
community or regional development. Growth is a part of the boom and bust cycle and is
inevitably replaced with a decline. While employment and income in regions that are driven by
exports (such as in coal mining regions) can be used to assess the business cycle, those indicators
should be used in conjunction with other indicators in order to demonstrate sustainability of
regional development over the long term.

The social and economic indicators of sustainable regional development are linked in numerous
ways. For example, housing quality is linked to health, which in turn has links to social
investment, education and training, employment, air and water pollution. The data requirements
vary both in quality and quantity. The official sources of economic data such as national official
Bureaus of Statistics provide a vast amount of data. The important consideration in whether to
use the official data is whether the area of the interest to the developer and local government
coincides with the localities as defined by the data provider.

Markey et al. (2005) argued that the traditional linear regional growth model is not appropriate
for export oriented regions. Innis (1933), in his studies of the growth of the Canadian economy,
showed the crucial importance of the export staple in shaping new economies. ‘Staple’ generally
refers to the main extractive industry commodity produced by the region. With growth occurring
around export based industries, some regions have secured federally subsidized improvements in
roads, ports and other infrastructure necessary to be competitive with other regions in hosting the
resource extractive industries, and have developed support industries. Weiss (2005) stressed that
government initiatives to support the industrial sector are important particularly in infrastructure
provision, education and skill development and fostering innovation. Capital investments in

9
these regions have tended to be from existing export oriented industries rather than from new
industries. This leads to regions becoming more dependent on the export oriented industry
without developing in a sustainable manner.

In analysing economic development, Markey et al. (2005) suggested using dependency criteria
based on Innis’ staple theory (1933). Staple theory recognises the limitations of the traditional
linear development theory that suggested five development stages for a given society, from the
traditional society to the mass consumption society. In traditional theory, the export-focused
society is only in a temporary stage on the way to an advanced and diversified economy. The
staple theory, in contrast, suggests that the transportation of raw materials over long distances
and dependency on external industrialised areas for export and for capital can cause local
instability, due to fluctuation of external demands and lack of local industries in staple producing
nations, and does not necessarily lead to diversified sustainable local economies (Innis, 1933,
Drache, 1976). Innis (1933) further noted that a staples providing nation causes deficiencies and
stagnation in other areas of the economy. Watkins (1982) investigated economic development in
Canada and argued that the ‘staple-trap’ leads to the lack of regional reinvestment in a staples-
based economy and creates a blockage to diversification and therefore creates
underdevelopment. He also suggested that shareholders, not regional economies, were primary
beneficiaries of the exploitation of Canadian resources.Furthermore, it was suggested by North
(1955) that an inevitable decline in the export oriented industry should be compensated by the
growth of others, or the region will be ‘left stranded’ (pp. 254). The main reason for decline in
such industry is the change in demand outside the region, exhaustion of natural resource,
increased cost of local production (e.g. land and labour) relative to other regions, as well as
technological changes (North, 1955).

The example of the Australian mining industry illustrates the discussion above. Australian
mining generates royalties to the government however local businesses cannot find labour due to
high wages in mining and lack of affordable accommodation in the local area (Rolfe et al. 2007).
Economic development remains constrained in many smaller communities in the state of
Queensland, as improved communication and transport options increase access to regional hubs
and larger centres. Many smaller communities lack the capacity or diversified economic
structure to service growth in new industry. For many mining developments, limited economic
structures in local areas create a ‘fly-over’ effect where business and employee expenditure tends
to be directed outside the local region (Storey 2001). This tends to result in the rate of economic
leakage from smaller communities rising over time and with increased resource development.

The mining sector has grown to be the largest industry sector in Queensland. Rolfe et al. (2010)
showed that while the traditional sectors of agriculture, and accommodation and food services
(which are closely aligned with the tourism industry) have had relatively low rates of growth
from 1989, mining has enjoyed much faster rates of growth (driven largely by price increases for
key commodities). There have also been high rates of growth in manufacturing, which
incorporates minerals processing. There also appears to be high growth rates in closely related
industries of construction, manufacturing and transport. These trends have potential to lead to the
problems outlined in the staples economy theory.

10
To avoid these problems, Markey at el 2005 (p.55) has suggested that the “long-term economic
health of communities and regions is largely associated with a diversified approach to
development. Attention to diversification also creates opportunities for local initiatives to play a
more recognized role in the health of community and regional economies”.

4.2 Local development versus linking strategies development

Local development suggests a pure reliance on local production and contrasts with linking
strategies development, which is a more open concept. Linking strategies are designed to address
“the issues of marginalization, innovation, and decline by seeking to close the gap between
communities and mainstream economic forces” (Markey et al. 2005, p. 129). House and
McGrath (2004) noted that a balanced approach - to strengthen both the internal local economy
and economic linkages with external markets - is more appropriate. The more a community is
dependent on external demand, the greater diversification is required in order to sustain the ups
and downs of the business cycle. The indicators explored in this chapter such as health of the
local economy and community access to capital can assist in determining the need for economic
diversification in different communities.

The appropriate strategy ultimately depends on the type of the community. The various types of
resource related communities are listed below. Socio-economic indicators such as the level of
dependency on external demand will vary among these communities.

 Settlements initially built to support the exploration and extraction and cease to exist
when the operations completed (e.g. Rhyolite, Nevada, the USA);
 Settlements initially built to support the new industry but have grown since then and are
host to a variety of industries (e.g. Moranbah, Australia);
 Existing settlements (in many cases predominately agricultural) expanded to support the
new industry (e.g. Springsure, Australia); and
 New industry operating within an area of highly diversified economic activity (e.g.
Muswellbrook, Australia).

The focus of this chapter is on a mixed community as described in the latter three types listed
above, with one or several dominant resource industries and where economic development is
seen to be appropriate to pursue. The dominant economic benefits from the increased presence of
a resource industry in the local area are employment, income and contracts to industries
supporting the resource industry. Since most resource industries are export oriented, local
forwards linkages (i.e. sales to the local businesses) are limited. The following sections explore
potential benefits and suggest strategies to maximise the positive impacts of expanding (or new)
resource industries in the local area.

4.3 Importance of local initiatives in response to economic change

The importance of local initiatives and local linkages among industries in response to economic
change cannot be underestimated. Saxenian (1994) assessed how two regions have adapted and
responded to economic change, explaining the contrast between the continuing dynamism of
Silicon Valley and the relative stagnation of Route 128 as due to the former’s reliance on

11
cooperative networking arrangements, which promote flexibility and collaborative learning, and
the latter’s experience of increasing organizational rigidities through its continuing orientation
towards vertical integration and product standardisation (Saxenian, 1994).

Lawson et al. (1998), however, cautions against assuming that local networks are invariably
beneficial. He provided an analysis of the processes of interfirm networking which assesses the
relative significance of local linkages versus global networks. The extent to which local linkages
are beneficial depends on the significance of geographical proximity and by acknowledging
potential problems of competition and dependency between firms (Lawson et al., 1998).

Maskell et al. (1998) explored how high-cost countries such as the Scandinavian states are able
to compete in relatively low-tech industries. A major part of their explanation is related to the
creation and utilisation of specialised tacit knowledge through alliances and partnerships
between firms at the national level. Their argument is founded upon the observation that patterns
of regional specialization remain remarkably durable over time, despite processes of
internationalisation. Maskell et al. (1998) concluded that the successful ability of Scandinavian
countries to remain competitive in certain specialised areas, can be explained in large part by the
existence of localized networks of collective learning, founded upon relations of shared trust.

The local communities can add to the success of local procurement by engaging in a variety of
initiatives (e.g. initiate and encourage new enterprises, develop human resources, strengthen the
informal economy, increase community involvement in natural resource management, increase
local ownership of business and resources, create sectoral development strategies (Maskell et al,
1998)).

4.4 Indicators to analyse local economies

There are many different types of indicators that measure social and economic change at local
levels. One of the important questions in designing strategies for local procurement is which
indicators to choose. NRM (2011) suggest using SMART indicators for assessing impacts on
local communities: Simple (easy to interpret, monitor and appropriate), Measurable (statistically
verified, reproduced and compared, aggregated, responsive to changes, can show the trend over
time), Accessible (can be regularly monitored, cost-effective, consistent with other data sources),
Relevant (linked to the goals and objectives) and Timely (provides early warnings of problems
and future needs).

An issue in assessing the impacts of resource industries is that most of the resource development
occurs in less populated areas. Data is usually not readily available at a small local scale. The
available statistics need to be treated with caution as the definition of rural or less populated
areas can affect the results and need to be selected depending on the purpose of the study (e.g.
census, rural and small town, non-metropolitan, OECD rural). A further important consideration
is the definition of ‘local business’:

 Regulatory/economic/political (e.g. council, statistical division)

 Geographic region (e.g. Bowen Basin in Australia)
 Local ownership (e.g. owned by a local person and located locally)

12
The socio-economic indicators typically used to analyse the health of the local economy are:

 (Un)employment rate, (e.g. ages 25-54) (%)

 Employment by industries (%)
 Average income of economic families ($)
 Incidence of low income (%)
 Persons ages 25-54 with some postsecondary education (%)
 Transfer payments (e.g. unemployment benefits) ($)

In general, rural areas where resources companies tend to operate are somewhat different from
urban more diversified economies:

 Employment is lower in rural areas

 Primary industries are usually the main source of employment in rural areas – measured
as a location quotient
 Income is generally less in rural areas
 Incidents of low income is less in rural areas
 Education level is lower in rural areas
 Transfer payments are higher in rural areas (due to a higher number of children,
unemployment, retirees).

Another important indicator of the health of the local economy is the level of economic
dependency on one or several sectors in the region. The market share of the industry can be
estimated using the “location quotient” (Hildebrand and Mace, 1950) or a concentration of
employment in a given industry in the area. Economic diversification is suggested as a solution
to the problem of dependency on one or several industries (Clapp 1998). Pierce and Dale (1999)
(among others) suggested that local development can be used to achieve economic
diversification. The lower the diversification indicator the more benefits community will achieve
by extending its economic diversity.

A goal of sustainable regional development, however, requires consideration of a broader set of

issues beyond the traditional indicators of economic health. For example, Table 1 suggests some
indicators of human and economic capital that represent factors contributing to the success of
local economic development (Markey et al., 2005, p. 146).

13
 Table 1. Baseline indicators of factors leading to successful local economic development
Success factors Some Indicators Data sources
Human capital
Skills Professions and skills in community Skills inventories;
Asset mapping exercises
Education and training Level of education in community by age groups and level of qualifications obtained; Official statistics (e.g. Census);
Availability of training programs (including adult education) Number of conventional educational institutions;
Courses available by educational/training
organisation
Leadership Diversity of leadership; Community survey
Inclusions; forums; support; delegation;
Mentoring programs
Civic engagement Ability of residents to engage in development activities Community survey
Entrepreneurial spirit Flexible and dispersed community leadership; Community survey
Acceptance of controversy;
A school system that emphasized scholarly endeavours
Labour force readiness Labour force participation; Official statistics (e.g. Census);
A number of workers between 25 & 44 years old (demographics 18-44/ 65+); Profile of community services;
Life expectancy; Health and social assistance statistics;
Infant mortality; Qualitative methods (e.g. interviews, observations)
Incidence of disease;
Access to medical services;
Incidence of suicide, drug and alcohol abuse;
Presence of healing centres of addiction programs;
Incidence of poverty;
Social assistance levels
Economic capital
Health of local Level of export base/trade relationship; Official statistics (e.g. Census);
(regional) economy Employment/unemployment/underemployment; Travel surveys and statistics;
Population growth rate; Local qualitative information
Population growth in popular areas (i.e. coastal)
Real GDP (GRP) per capita;
Multi-factor productivity (Gross product per combined unit of labour and capital)
Gross per capita disposable income;
Income and income distribution;
In-/out-migration levels;
Social assistance levels;

14
Success factors Some Indicators Data sources
Economic multipliers;
Office vacancy rates;
Building permits;
Ratio of mining area rehabilitated to total mining area
Diversity Share of industries output in local economy; Official statistics (e.g. Census);
Employment and income by industry Local firms (e.g. annual reports, interviews);
Business licence information
Adaptability Research and development; Local firms (e.g. annual reports, interviews);
Staff training programs; Inventory of services;
Compliance with new industry standards and regulations; Internet service providers;
Access to information (e.g. internet, resource centres, postsecondary institutions, networks Evidence of linkages with external organizations
with external agencies and other communities);
Land use changes
Health of local Diversity and security of markets; Local firms (e.g. annual reports, interviews);
businesses Local purchasing, hiring, investment, leakage; Leakage modelling or surveys
Supply and demand linkages among local businesses; Market information
Availability of financing;
Personnel turnover;
Profit margin/costs of production;
Price stability
Sustainability Is the production ecologically sustainable (e.g. harvesting, extraction); Ecological indicators;
Annual energy consumption by sector/capita; Qualitative data (e.g. interviews)
Emissions per year/capita
Informal economic Voluntary and unpaid household activity (e.g. child care by family members) Community survey;
activity Official statistics (e.g. Census)
Local control Local ownership and control; Local firms;
Local employment; Leakage surveys;
Local spending; Official statistics (e.g. Census);
Dependency on government revenue and external markets Resource management agences
Access to capital Access to traditional funding; Data from funding bodies;
Level of public funding; Interviews (e.g. local organisations, financial
A number of alternative forms of financing; institutions);
Investor confidence; Inventory of available services;
Tax base; Official statistics (e.g. Census)
Evidence that community is willing and able to invest in community economic
development or initiative
Location/infrastructure Distance from the markets; Official statistics (e.g. Census);

15
Success factors Some Indicators
Proximity to other communities;
Quality and number of physical capital;
Traffic density;
Average commuting distance to/from work
Service amenities Number of tourist attractions;
Cultural and service amenities;
Educational facilities;
Health care services;
Community festivals;
Arts programs and events;
Range of retail and service businesses
Source: Markey et al. (2005) and UN (2001)
Data sources
Qualitative assessment of local conditions;
Sales tax information, retail, income and
population;
Road distances
Inventory of services;
Qualitative assessments;
Visitor/residents surveys
16
The WBCSD (2012) has proposed a set of indicators that represent factors contributing to the
success of local procurement. These factors are described as drivers in the local economy that
affect firm-level competitiveness. A distinction is made between drivers of competitiveness at
the microeconomic or macroeconomic level. Microeconomic drivers include: human resources
and management capabilities; technological capabilities; access to finance; access to
procurement opportunities with large investing companies; and local infrastructure (such as
transport, energy and communications); and clusters and support structures (such as industry
commissions and trade associations) to generate additional synergies and opportunities for local
firms. Macroeconomic drivers include capital markets; regulatory environment, and ease of
compliance and certification with regulation; import and export regimes, investment incentives;
national infrastructure; and workforce improvement, through educational and training policies.
The WBCSD (2012) argues that generally, government will have responsibility for
macroeconomic drivers, while others drivers are influenced through collaborations between
resources companies, government, and other partners.

The assertion in this chapter is that local procurement initiatives are sustainable and should be
pursued if they contribute to regional development and the development of competitive
suppliers. The next section illustrates how participatory SEIA can be applied to these ends.

5 Applying participatory Social and Economic Impact Assessment to

local procurement
A motivation for this chapter is the little attention that resource developers give to the
management of social impacts (negative and positive) associated with their local procurement
interventions. The field of impact assessment offers a number of methods to assess
systematically each alternative available to project developers intent on making opportunities
accessible to local businesses, build local business capacity to meet contract requirements, and
improve their competitiveness. Social and Economic Impact Assessment (SEIA) deals with the
processes of managing the socio-economic issues associated with planned interventions (Esteves
et al., 2011; Vanclay 2003). SEIA is an interdisciplinary and/or transdisciplinary social science
that crosses and incorporates many other social sciences, including sociology, anthropology,
demography, development studies, gender studies, social and cultural geography, economics,
political science and human rights, community and environmental psychology, social research
methods, and environmental law (Esteves et al., 2011).

In addition to being a field of research, SEIA is also conceived of as being a methodology,

framework or approach. SEIA practitioners use this approach in order to contribute to the
resources development process. SEIA practitioners work with communities to achieve better
development outcomes for communities. They also work with resources companies to design
better projects, and/or they work with regulatory agencies to provide information for the
development approval process and ongoing regulation of resources projects.

The activities typically undertaken by an SEIA process are well established. Adapting the
process to consider procurement impacts essentially involves:

17
  creating participatory processes and a deliberative space to facilitate local government
and community discussions about desired economic futures, the acceptability of likely
impacts and proposed benefits, as well as their ongoing input into the SEIA process;
 gaining a good understanding of the communities likely to be affected by the
procurement activity (i.e. community profiling), including a thorough stakeholder
analysis to understand the differing needs and interests of those communities;
 identifying community aspirations for economic development through qualitative and
quantitative research methods;
 collecting baseline data on the strength of human and economic capital in the region, and
conditions required for local firms to be competitive;
 scoping the key social and economic issues (the significant negative impacts as well as
the opportunities for creating benefits);
 forecasting the social and economic changes that may result from the procurement
activity using predictive techniques (discussed in the next section);
 establishing the significance of the predicted changes, and determining how the various
affected groups and communities will likely respond;
 examination of options or alternatives;
 identifying ways of mitigating potential impacts and maximising positive opportunities;
 developing a monitoring plan to inform the management of change;
 facilitating a collaborative regional economic development plan between local
government, the resources developer and relevant stakeholders such as chambers of
commerce and business associations;
 assisting the resources developer in the drafting of a Social and Economic Impact
Management Plan (SEIMP) that operationalizes all benefits, mitigation measures,
monitoring arrangements and governance arrangements that were agreed to in the
collaborative plan; and
 putting processes in place to enable resource developers, government authorities and civil
society stakeholders to maintain an ongoing role in monitoring.

Adapted from Vanclay and Esteves, 2011, pp.11-12

The following section will focus on one aspect of SEIA in particular: the selection of predictive
techniques and local procurement impact variables to be monitored over time.

6 SEIA methods to guide local procurement strategies

6.1 Predictive methods to assess potential social and economic impacts
Three predictive methods often used in impact assessment are: impact pathway analysis, scenario
analysis and modelling. Consideration of procurement impacts has tended to be limited to expert-
led economic modelling, which has been weak in informing local procurement strategies and
identifying measures to enhance the employment and supplier development impacts of major
projects. Tools such as impact pathway analysis and scenario analysis are more suited to
incorporating stakeholder input, and can incorporate modelling. The modelling, most commonly

18
referred to as economic impact assessment, tends to be the dominant approach employed by the
resources industry to estimate the employment and income effects of the proposed project. The
size of the economic multiplier in a local or regional area can be explained in the following
manner (Jensen & West, 2002):

 The extent to which project operators purchase inputs from the local or regional
economy. Examples of inputs include wages for labour supplied from the local or
regional area, and purchases of goods and services. The more a project operator sources
from the local or regional economy, the more money is directly injected into the
economy.
 The extent to which money spent in a local or regional economy is retained within that
economy. If there is minimal opportunity for people receiving income to spend it on
goods and services in their local or regional area, then not as much money will be kept in
the local or regional area. Larger and more diverse regional economies tend to be better at
keeping expenditure in their economy and not ‘losing’ it to other regions.

The range of tools that can be used for the economic impact assessment vary from a simple
spending multiplier, input output (IO) modelling to the general equilibrium (GE) modelling
(Ivanova et al., 2007). Input output modelling is a popular technique to assess the impacts on
region. Ivanova and Rolfe (2011) describe the use of input output modelling as part of impact
assessment in Queensland, Australia. Depending on the need for accuracy of the model, and time
and budget available, the data can be a) collected using surveys of households and businesses, b)
utilised from the existing national/state level input output tables, or c) collected using a mix of
both approaches.

The multiplier effect can be estimated by the application of what are known as Keynesian
multipliers. This relates the increase in economic activity from an initial spending injection to
both the propensity of spenders to shop locally, and the proportion of expenditure that becomes
income to local residents (Jensen and West 2002). A simple formulation of the Keynesian
income multiplier is as follows (where k stands for the multiplier):

k = 1/(1 - MPCL x PSY)

Where:

MPCL is the marginal (or average) propensity to consume locally, or the proportion of
income (or income change) which is spent locally, and

PSY is the proportion of local consumption expenditures that eventually becomes local
income, i.e. local salaries and wages, profits and interest payments. It is an expression of
the proportion of each dollar spent locally which ends up in the pockets of the local
community rather than paying for imported goods and services (Jensen and West, 2002,
pp.13-16).

Jensen and West (2002) suggest that for small communities (less than 5000 people), the MPCL
will range from 0.2 – 0.4. For larger communities, the MPCL will be more like 0.6 -0.7. The

19
PSY can be expected to range between 0.25 and 0.75. Higher proportions are expected in
service industries where labour is a high proportion of total costs. Lower proportions are
expected where most of the business turnover reflects goods and services purchased in from
outside a local area. In small communities the PSY can often take the value of about 0.4 – 0.5.

If using national/state level tables, the smaller the area under investigation, the less accurate will
the estimates be. It might be more appropriate to use a simplified analysis (e.g. simple multipliers
or LM3 developed by Sacks (2002)).

The simple multipliers approach, including LM3, is not able to provide an important insight from
the economic analysis – the interdependence of industries in the region. In contrast, the IO
models allow one to measure the significance of existing economic activities and industries and
their interdependence: who are the core drivers, who are the movers and shakers, who are the
dominant supply and demand chains, where the bottlenecks to economic growth are located. The
key sectors can be identified on the basis of backward and forward multipliers for output, income
and employment. The activity of a particular sector has two kinds of economic effects on other
sectors in the economy: demand and supply driven effects. The demand driven effect reflects the
changes in sales from industries within the region to the industry under consideration. The
supply driven effect reflects the changes in purchases from industries within the region from the
industry under consideration. Significant sectors in the economy are identified by comparing the
magnitude of their backward and forward multipliers, scaled by the overall prominence of the
sector.

If the backward multiplier of one sector is larger than that of the another sector (i.e. food
manufacturing versus gas supply), it can be suggested that one dollar of expansion of the former
sector’s output would be more beneficial to the economy than would an equal expansion in the
latter sector’s output in terms of generating more productive activity throughout the economy.
The analysis is similar for the forward multipliers (i.e. gas supply versus electricity generation).
This will provide an indication of the production capacities of local industries, an important
consideration in developing local procurement strategies.

Survey-based IO methods can be used at the small scale. One example is the Tweed and
Northern Rivers Input Output Economic analysis model commissioned by the Tweed Economic
Development Corporation in 2002. The model established individual and interdependent
economic input output models for the local government authorities in the Northern Rivers
Sustainable Regions Area, NSW, Australia1. The data from six local government areas were
collected to allow for building of the models at the local level and with annual updates. The
model assists local councils to understand the structure of local economies, and identify the need
for interventions in local communities. The model has the capacity to influence policy decisions
by the Councils by providing for a more informed policy decision making process. The model
also assists in analysing the economic performance of the region over the boom and bust
business cycle. Two other survey-based approaches have been applied by Stevens et al. (1983)
and Garhart et al. (1995).

1
http://www.pc.gov.au/__data/assets/pdf_file/0018/76104/subdr070.pdf

20
Depending on the goal of regional development (e.g. employment, income or gross regional
product (GRP)), growth in relevant sectors needs to be encouraged. Ivanova (2012) illustrated
that the key sectors in a region that are most important in terms of long term development of the
region (identified by IO modelling) are different in different regions. The implication is that the
local procurement strategies to focus on in those sectors will be different in different regions.

Social and economic benefits and costs that are not readily available from official statistical data
can be assessed using a variety of market and non market valuation techniques (such as Choice
Modelling) (Ivanova and Rolfe, 2011). Once the key issues are identified, community
stakeholders are asked to make a series of choices amongst presented scenarios with the issues
involved. The survey typically involves the monetary tradeoff to allow the estimation of explicit
prices of changes in levels of key issues and the tradeoffs among the issues. This method also
enables a statistical estimate of the priorities the respondents allocate to the issues presented.

Significance can be assessed using basic risk assessment models, which involve an estimate of
likelihood (ranging from rare to almost certain) and consequence (insignificant to catastrophic).
Common risk ratings that are assigned are as follows:

 Low: it will not have an influence on the decision;

 Moderate: it should have an influence on the decision unless mitigated; and
 Extreme or high: it should influence the decision regardless of any possible mitigation.

Considering the residual risks and feasible enhancements, the resources company’s supply chain
manager and stakeholders then go about selecting strategies to make opportunities accessible to
local businesses, building their capacity to meet contract requirements, and improving their
competitiveness.

6.2 Monitoring social and economic impacts

It is important to note that, as it is impossible to predict all direct and indirect impacts, having a
monitoring and adaptive management process in place is necessary to deal with any unintended
consequences of the chosen procurement strategy plus check that proposed improvements are
indeed working. The monitoring process should not be limited to selected social impact
indicators and trends; the business value to the company from investing in local procurement and
supplier development also requires attention. Investing in local supplier development programs
should not be approached as a philanthropic act, but rather as a form of business investment.

Taking the perspective that local procurement provides mutual gains to project developers and
their communities, measures of business value also need to be incorporated in monitoring. The
examples of costs and benefits of local procurement as well as indicators are presented in tables
2 and 3. Indicators should be linked to the business drivers for procuring from the local
communities, which will vary across project stage and country context. Examples of business
activity/output indicators include: value of goods and services procured locally by the company;
number of local suppliers; number of local employees hired by local suppliers; local procurement
as a percentage of total corporate procurement; and company procurement spend as a proportion
of overall procurement of goods and services in the area. Examples of business outcome

21
indicators include: faster timeframes for project approvals due to community and government
support; reduced costs associated with delays in delivery; reduced costs of closure or
decommissioning; increased quality of supply to the company; and reduced risk of protest action.

22
 Table 2. Examples of costs of local procurement and indicators
Costs Indicators
Start up costs Higher market prices
Transaction costs Higher market prices
Allocative inefficiency Higher market prices from
excessive supplier
development investment
Ratepayer burden Higher market prices
Various social costs Negative social impacts such
as traffic, population growth,
crime rate, shortage of service
providers; weakened social
cohesion; dependence post-
closure or post-contract
Costs to production Schedule delays
Source: Esteves and Barclay (2011) and SupremeLink (2001)
Cause/Reason
Information management (e.g.
development of a database or
inventory of local suppliers);
Technology (e.g. electronic mail-
based procurement or e-
procurement systems);
Technical support costs (e.g.
maintenance of systems)
Engagement costs with local
suppliers;
Market distortion
Ineffective initiatives to give
preference to local businesses and
build their managerial and
technical capability
Cost of development and
implementation of the local
supplier development policies
Various reasons, such as drain
from other sectors; in-migration,
strengthen elites/exacerbate
power relations
Market distortion
Who bears the costs Potential mitigation strategies
Local community, Collaborative investment of start-up costs
local government, between industry, government and local
industry businesses
Local community, Supplier development program to boost the
local government, competitiveness of local suppliers;
industry Encourage competition amongst local
businesses
Local community, Monitoring and evaluation of supplier
local government, development initiatives
industry
Local community, Collaborative development of policies
local government, between industry, government and local
industry businesses
Local community, Align local procurement strategy with
local government, government regional development planning;
industry Collaborative investments to encourage
economic diversification, fill gaps in sectors
being drained through social investment, and
alternative markets for suppliers;
Communicate local procurement opportunities
using mechanisms based on transparency,
fairness and equity
Industry Procedures for pre-qualifying local suppliers,
initiatives to develop their capability and/or
resources to monitor safety and quality
assurance
23
 Table 3. Examples of benefits of local procurement and indicators
Benefits Indicators Cause/reason Who benefits
Higher quality Depends on the product Investment in local supplier development Industry
Security of supply Average number of days (delays) Investment in local supplier development Industry
Contribution to assuring Community acceptance/government acceptance Benefits of developing the mine are aligned with Industry, Community
right to mine community aspirations
Increase in Changes in prices over time, comparisons Investment in local supplier development Industry, Community
competitiveness of between supplier price and market price
supplier markets
Lower ‘total cost of Costs associated with managing quality, service, Investment in local supplier development Industry
ownership’ delivery and price of suppliers
Increase in employment Labour force size and participation by sector Increased direct and indirect employment levels by Community, Industry
local suppliers
Increase in income Average and median income by age group and Increase in wages and salaries paid by local Community
gender, and income source suppliers and total income of the suppliers and
employees that is spent in local area
Increase in local economic Change in number and volume of local contracts Increase in % of spend that is spent locally by Community
activity given to local suppliers employees and businesses
Reduced dependence on Diversity of the local economy (backwards and Investment in supplier development to facilitate Community, Industry
resources sector forwards linkages) access to other markets post-closure or post-
contract
Women’s participation in Levels of ownership by women and women’s Reducing gender-based barriers to participation in Community
the economy employment in local businesses procurement opportunities and increased
investment in women’s skills development
Increase in suppliers’ Cash and volunteering contributions Increased involvement in / support for local Community
social investments community organisations
Increase in social Rating basis (from rate paying local suppliers) Increase in local suppliers paying council rates Community, Industry
infrastructure
Transfer of new Process improvements and the introduction of Investment in supplier development and attracting Industry, Community
technologies and new products and services new businesses into the region
innovation
Strengthened capacity for Existence of strategic community agenda, diverse Community participation in economic Community, Industry
local governance and inclusive citizen participation, and consistent development planning and monitoring
progress towards goals

Source: Esteves and Barclay (2011) and SupremeLink Consultants (2001)

24
7 Summary
This chapter attempted to answer the question of how community social and economic
development can be catalysed by participation of local businesses in mining supply chains. It
looked at community social and economic indicators, strategies to develop long term
sustainability, and how to optimise benefits to local communities using social and economic
impact assessment.

In many cases, resource extractive industries have encouraged settlements in areas not suitable
for traditional regional expansion. Resources are generally located in remote areas, far from easy
access to infrastructure and services and from existing settlements. While settlements can be
built to support the industry and then later abandoned when the industry ceases to operate in the
area, most settlements begin to grow and attract other industries supporting the extractive
industry.

In order to achieve sustainable regional development, a multi-stakeholder approach should be

employed and a set of indicators should be used as a guide to assess company strategies for local
procurement and supplier development.

Resource communities can increase their long term sustainability by assessing their socio-
economic indicators and implementing strategies that enhance the positive benefits and mitigate
the negative consequences of the projects. While some communities will benefit more from
developing their own industries, the majority of regions are likely to benefit to adopt the dual
approach of diversifying the local economy and enhancing the links to the rest of the world.

An important step for resource dependent communities is to undertake a basic socio-economic

analysis to determine the level of resource dependency and the specific industries that should be
encouraged to operate in the region. Knowledge of the success factors and their indicators will
assist these communities to assess and increase their capability to develop initiatives for local
procurement.

Similarly, resources firms can draw on a variety of indicators such as service amenities, local
infrastructure, health of local businesses, diversity and adaptability of local communities to guide
their local procurement efforts.

In summary, resources companies can contribute more effectively to regional development by:

(i) Undertaking a social and economic analysis of the investment alongside its financial analysis
in order to identify the potential economy-wide social impacts;

(ii) Working with local government to identify the key sectors that contribute to regional’s
economic development;

(iii) Engaging in local procurement with those key sectors; and

25
(iv) Investing in collaboration with government in strengthening the human and economic capital
that contributes to competitive suppliers.

Based on sound analysis, local procurement of goods and services has the potential to reduce
expenditure leakages from the local economy. Acting through the multiplier, local procurement
will therefore stimulate economic activity and encourage additional investment and higher
employment in the local economy. A more prosperous local economy will also attract new
suppliers to the area and lead to a more competitive supply base.

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