Regional businesses are not asking for the world. What is small to a major mining company … is enormous for a regional business … Regional businesses simply need the opportunity to supply a portion of the mining sector’s needs.
3.1
This chapter outlines the local procurement policies of mining companies and the practices that take place. It then goes on to outline the barriers that local small and medium enterprises in regional areas face when attempting to become part of a mining project’s supply chain.
3.2
The chapter finishes by considering options for increasing local procurement and making recommendations.
3.3
Local procurement refers to the practice of mining companies contracting with local businesses, usually SMEs, located in the areas close to their assets for goods and services.
Local procurement policies and practices
Mining company procurement policies
3.4
Many mining companies made submissions to the inquiry outlining their local procurement policies.
3.5
The Minerals Council of Australia submitted that many of their members work to develop local procurement policies that ‘seek to balance commercial and operational considerations with community preferences’.
3.6
The Minerals Council of Australia further outlined the importance of local procurement in mining regions. In Mackay in 2016-17, the resources sector spent $2 billion with 1,733 local businesses; in the Fitzroy region it spent $1.8 billion with 2,763 businesses, and in the Hunter Valley the mining sector contributed $15.2 billion to the local economy.
3.7
Mrs Tania Constable from the Minerals Council of Australia acknowledged that many local businesses would like to work with the mining sector; so many mining companies have their own local procurement programs, which are:
…tailored to the economic profile and capabilities of host communities and business needs while balancing the real pressures of operating in a globally competitive environment.
3.8
Mr Drew Wagner from the Minerals Council of Australia Northern Territory (NT) Division said Glencore's McArthur River Mine spent $370 million in 2017 with 500 suppliers, many of which were based in the Northern Territory.
3.9
Mr Stephen Galilee from the NSW Minerals Council outlined some of the initiatives the Council has undertaken to assist local businesses:
It has supported local business chambers though financial support, sponsorships, promotion of local suppliers and awards;
It also holds events that link the Council’s member companies with local businesses and has done two of those events in Tamworth in the last three years.
3.10
Ms Jeanette Hasleby from Roy Hill Holdings gave evidence about its local procurement policies:
During the construction phase of the mine, Roy Hill held regular supplier briefings in Perth, Port Hedland and Newman. After this, it moved to quarterly contractor briefings. It also runs Indigenous supplier briefings and has obligations in all of its native title agreements that relate to traditional owner businesses.
Roy Hill maintains a database of traditional-owner companies. Ms Hasleby’s role in the company is to ensure those businesses get tender and procurement opportunities. She also makes suggestions of local and Indigenous businesses that could fill procurement contracts.
Roy Hill had been approached by the Department of Industry, Innovation and Science about the Austmine supplier development program and also mentioned the Western Australian Local Capability Fund as successful initiatives to increase local procurement.
3.11
Ms Linda Dawson summarised Rio Tinto’s local procurement policies and practices:
Rio Tinto has a local procurement portal with 840 registered businesses and 270 work packages listed in 18 months.
It has a dedicated local procurement team to provide support services for local businesses.
The local procurement program is examined externally by the CSIRO Local Voices initiative which publishes its results on a website. Results from June 2018 indicate the local procurement program has been positively received.
Rio Tinto launched a capability enhancement program in July 2018 with the Regional Chambers of Commerce and Industry of Western Australia to create more sustainable business in regional Western Australia.
Rio Tinto also has an Indigenous procurement program. In the Pilbara in 2017, the company spent 39 per cent of their procurement spend with Aboriginal businesses.
Rio Tinto has spent $1.5 billion with Queensland businesses, $244 million of that spent with businesses in Cape York.
Rio Tinto developed a Local Indigenous participation program for the Amrun mine in Queensland. Potential contractors for work packages over $1 million dollars had to submit a local Indigenous procurement program and detail employment targets. This project has spent $2.1 billion with 1,130 Australian suppliers, including 770 Queensland businesses and 17 Aboriginal and Torres Strait Islander businesses.
3.12
Mr Tom Weaver from Fortescue Metals Group talked about the company’s procurement programs:
Fortescue has spent $2 billion on procurement with Western Australian businesses over the last three years, with six of that spent in the Pilbara region. Procurement expenditure in the Pilbara is roughly $200 million and involves 801 different local businesses.
Fortescue has an aspirational target to spend a quarter of its procurement budget with Indigenous businesses. In the 2018 financial year, Fortescue spent $230 million with 52 Aboriginal owned businesses (7.5 per cent of its total procurement spend).
Fortescue also owns The Pilbara Infrastructure Pty Ltd, which contacts Western Australian businesses and asks them to register expressions of interest for tenders.
Where a Western Australian business has not won a tender, Fortescue attempts to introduce local businesses to the successful tenderer to explore the possibility of subcontracting. Fortescue also engages with chambers of commerce and industry in Port Hedland, Karratha and Newman to provide briefings.
Fortescue Metals is undertaking the Pilbara supply development project in conjunction with the Department of Industry, Innovation and Science (DIIS). The project aims to enhance the capability of SME suppliers.
3.13
Glencore states it has spent $4.8 billion on goods and services with 4,000 suppliers in 2017. Approximately 80 per cent of that amount was spent with local and regional businesses. Within the Singleton area, it has 270 supplier businesses, from small business food suppliers to large industrial businesses.
3.14
Mr Anthony Pitt from Glencore Coal Australia said that it prefers that suppliers are based close to the mine sites. Glencore regularly holds forums with local businesses to promote opportunities for contracting.
3.15
The Isaac Regional Council highlighted the work of Anglo American Metallurgical Coal regarding local procurement. In 2015 Anglo American funded the part-time employment of a Growth and Resilience Officer to develop the E-Business Directory. This directory allows small businesses to display their capability and services to the Anglo American supply chain.
3.16
Anglo American submitted that its policy is for ‘sustainable, responsible local procurement that positively contributes to a resilient supply chain’. In the 2017-18 financial year, it invested heavily in local and state based procurement.
3.17
Peabody Energy submitted that it spent the following in the 2018 financial year:
In Queensland it spent $800 million with over 820 suppliers (47 per cent of its total supplier spend);
$25 million of this was in communities close to its operations;
$280 million was spent in the Mackay and Bowen Basin region;
In New South Wales it spent $500 million with 770 businesses (30 per cent of its total supplier spend);
$160 million of this was in communities close to its operations;
$170 million was spent in Mid-Western, Singleton and Wollongong Council areas;
Less than 0.3 per cent of Peabody’s procurement spend was with overseas suppliers with no Australian subsidiaries.
3.18
Yancoal Australia reported that it ‘supports local procurement and buys locally when commercially possible to do so.’
3.19
Dr Malcolm Roberts from the Australian Petroleum Production and Exploration Association (APPEA) described its members’ procurement and policies:
Its members paid $3.5 million in local procurement, local government and state taxes in 2016. In Queensland there are roughly 3,500 local suppliers, half based in regional areas, providing goods and services to the industry.
APPEA’s members have initiatives for improving local procurement, such as assisting with the tender process and business capacity.
APPEA does not have a specific model for its members to use regarding local procurement.
3.20
ConocoPhillips Australia submitted that it has invested heavily in regional industry bodies such as the Gladstone Chamber of Commerce and Industry and the Gladstone Engineering Alliance in order to develop business opportunities for those organisations members.
3.21
ConocoPhillips also participates in supply chain expos in regional areas. In the Gladstone region it conducts a Health, Safety and Environment Forum annually to share best practices and knowledge with its contractors.
3.22
Mr Paul Flynn from Whitehaven Coal said that local procurement is a priority for Whitehaven. Whitehaven advertises locally for some contracts and directly informs suppliers of work they could tender on. Further, he said local business make up half the offers for a service tender in the region.
3.23
Mr Mark Schubert from Origin Energy stated the company’s procurement and policies:
Origin aims to support regional businesses and economies. It sourced 11.5 per cent ($236 million) of its goods and services from regional suppliers in the last financial year. In the last three years, local and regional suppliers have provided over $705 million worth of goods and services to its Queensland operations.
It has created opportunities for regional suppliers through its ‘category muster’ events, which allow local businesses to better understand upcoming opportunities.
3.24
Origin also requires bidders for major contracts (tier 1 and 2 contractors) to develop plans and make commitments to regional and Indigenous procurement. Origin has trialled this approach over the last year, successfully including the requirement in three contracts, and intends to continue it.
3.25
Contrary to this, BHP stated that it does not impose specific requirements on its contractors regarding commercial arrangements due to ‘practical and legal issues with [the] enforceability of this’.
3.26
The City of Kalgoorlie-Boulder stated that Kalgoorlie Consolidated Gold Mines provides a good example of local procurement, saying that 30 per cent of its suppliers were located in either Kalgoorlie or Boulder.
BHP’s C-Res program
3.27
BHP’s C-Res program was mentioned in several submissions and in evidence presented to the Committee as an example of a local procurement success story.
3.28
C-Res is a cost neutral, independent, social enterprise organisation that operates BHP’s local buying program across Australia. The directors of
C-Res are also the trustees for BHP’s Local Buying Foundation, the philanthropic arm of the local buying program.
3.29
The Local Buying Foundation’s intention is to improve local business capacity and sustainability and it runs a variety of programs in order to further this aim. The local buying foundation is funded by a service fee for the use of C-Res which is paid for by BHP.
3.30
The C-Res program was designed to connect local small businesses with BHP. The definition of small business used by C-Res is that used by the Australian Taxation Office; an enterprise with 20 or fewer employees. C-Res does not include apprentices, contractors or casual employees in that number.
3.31
The program was conceived in 2010-11 to resolve a ‘missing link’ between BHP and small companies in the Isaac region. It was expanded to Mackay in 2015, and then to New South Wales, South Australia and Western Australia. C-Res has grown 30 per cent each year for the last 3 years.
3.32
BHP owns the intellectual property of the program while C-Res owns the database of businesses.
3.33
Mr James Palmer from BHP said that while it is a global company, BHP values its relationships with local communities. BHP engages with more than 4,600 vendors, 700 of which are local to its assets. In 2017, BHP spent $1 billion with local businesses, 80 per cent of this was spent in the Central Highlands, Mackay and the Isaac region.
3.34
Mr Porter said BHP was ‘incredibly proud of the program’, which has more than 1,100 suppliers who have received $247 million, $95 million of that in 2018.
3.35
C-res has 423 small businesses registered with the program, of which 183 are located in Isaac and 166 are in the Central Highlands.
3.36
Chairman of C-Res, Ms Kylie Porter stated some of the achievements of C-Res in 2017-18:
the program turned over $85.5 million across Australia, $43.6 million in Mackay, $27.2 million in the Isaac and $12.5 million in the Central Highlands;
over 7,000 work instructions were processed and more than 14,200 payments were made under the program; and
the local buying foundation received $1.14 million.
3.37
The Isaac Regional Council submitted that, through a survey of businesses who worked with the mining industry:
the majority of businesses received at least 30 purchase orders or contracts through the C-Res program;
28 per cent of businesses received over $120,000 of their income per annum from this program; and
over 70 per cent of businesses considered that their business had grown because of C-Res.
3.38
The Council described C-Res as an example of genuine mining industry support for regional businesses and recommended that the federal government consider the C-Res model as a basis for similar programs for local procurement in regional areas.
3.39
When small business expand beyond the program’s definition of ‘small business’ they are grandfathered out of the C-Res program by negotiating directly with BHP for transitional payment terms.
3.40
Ms Porter argued that the success of C-Res was due to its transparency and independence from BHP.
3.41
C-Res and BHP have discussed encouraging its major Tier 1 and 2 contractors to use the program for their downline contracting. This has been difficult however due to the spending threshold of the program and BHP’s internal supply policies.
3.42
Ms Bronwyn Reid, a member of the C-Res Local Buying Foundation advisory board, said BHP is looking at this ‘but the wheels of large industry sometimes turn very slowly’.
3.43
Ms Porter stated that making every BHP employee issuing a work instruction go through C-Res would make the program work better.
3.44
C-Res currently has a program with the Resource Industry Network to identify which of its members are eligible but not using C-Res.
3.45
Mrs Adrienne Rourke from the Resource Industry Network supported the work of the Local Buying Program and Foundation, but noted the programs limitations: most businesses have more than 20 employees and do not receive their work directly from BHP, but as downline contractors for Tier 1 and 2 contractors. Only 10 per cent of the Resource Industry Network’s members fit within C-Res’ parameters.
3.46
Ms Vicki Leeson from the Central Highlands Development Corporation echoed these remarks, saying business owners find C-Res’ requirements too arduous to comply with, and the program ‘needs to go further’.
3.47
Mr Mark Bushell from CE Smith & Co Chartered Accountants revealed that he has had clients excluded from the program due to having existing contracts. One of C-Res’ requirements is a business must be applying for a new contract.
3.48
Mr Peter Carter from the Port Hedland Chamber of Commerce said BHP had started C-Res in the Pilbara region and it had been very successful, having spent $120 million in the area. He hoped that other mining companies like Roy Hill and Fortescue either join the program or start their own versions of it as ‘it would be fantastic for the town’.
3.49
Despite the success of C-Res, BHP still has approximately 80 per cent of its expenditure through tier 1 and tier 2 suppliers. Its subcontractors have no access to C-Res.
Local procurement in practice
3.50
Despite many large mining companies having local procurement programs, many witnesses proposed that regional communities are missing out on these opportunities.
3.51
Mr Keiran Moran from the Gladstone Engineering Alliance stated that major mining companies are ignoring local engineering and manufacturing firms, despite their high level of skills, and that local companies are cut out of the procurement process ‘before it even starts’, due to the metropolitan location of mining company offices.
3.52
Mayor Anne Baker from the Isaac Regional Council gave two examples of missed opportunities for local procurement in the region:
1
A local licensed establishment supplied a mining camp bar, allowing the business to employ one more person. The company then withdrew the contract and started sourcing supplies from Brisbane, meaning the business lost the opportunity.
2
A local food provider employing 14 people supplied several worker accommodation camps near Moranbah. The camp cancelled the contract without allowing the business to tender for the next round of purchases, leading to ten people losing their jobs.
3.53
Mayor Baker stated if each of the 41 workers’ camps in the Isaac region purchased 10 per cent of their goods and services from local businesses it would have a huge economic benefit to the region, adding: ‘Regional businesses are not asking for the world.’
3.54
The Local Government Association of Queensland listed examples of missed local procurement opportunities:
1
A Western Downs region mining camp has its beef supplied from an abattoir in Victoria despite being in a beef producing region of Australia.
2
Laundry is being collected in Chinchilla and Miles and laundered in Brisbane, then being flown back to the region.
3.55
Ms Leeson is a business facilitator helping local businesses work with mining companies. Her position is funded by BHP through the C-Res program. Very few companies have roles like hers in regional communities but she views this role as being critically important.
3.56
Ms Leeson said mining companies do not give enough authority to employees in the regions to make decisions about procurement. They also lack understanding of how important local buying is to regional communities.
3.57
Ms Reid pointed out that it is easier for a large mining company to have one contract with a major contractor, than ten contracts with smaller companies. This model ‘outsources’ risk.
3.58
Mr Brian O’Gallagher from the NT Chamber of Commerce put the onus on businesses to be proactive about becoming a part of the mining supply chain. The Chamber had been working to raise the profile of local business, and noted local businesses cannot assume the mining company knows that they have capability to do the work.
3.59
Ms Stacey Cooke from the Gunnedah District Chamber of Commerce and Industry echoed the view that local business needs to ‘step up’, providing the example of her husband’s company, which became a subcontractor to Daracon after calling and offering its services.
3.60
Ms Cooke stated the Gunnedah Chamber holds events and workshops for its members in order to increase opportunities, adding: ‘The opportunity is there.’
3.61
Regional Development Australia Far North submitted that mining companies may not be aware of local SME’s existence or capabilities. It recommended using a central tendering system such as the Industry Capability Network which allows businesses to upload a profile and sign up to tenders when they become available.
3.62
Mr Greg Lamont from the Association of Mining and Energy Related Councils gave evidence that larger companies that already contract with mining companies move to establish themselves in regional communities to take advantage of new work, meaning local businesses miss out. Local SMEs cannot expand or upskill fast enough. Daracon was cited as an example of this practice. Mr Lamont recommended that the Federal Government seek reforms from the mining sector to decrease this practice.
3.63
One mining services company (name withheld) stated that the lengths of contracts offered by mining companies are too short. Contracts are typically 12 months long and take too long to establish, creating uncertainty for SMEs and their employees.
3.64
The Isaac Regional Council praised Anglo American for its work on local procurement, in particular the E-Business Directory, but found that there was no significant on-going engagement with local SMEs from it. The Council found that only 28 per cent of mining-related SMEs had heard of the E-Business Directory and none had received any income from it.
3.65
City of Karratha Mayor, Councillor Peter Long, praised Rio Tinto’s local procurement program but noted its procurement team ‘is Perth based, unfortunately’. Rio Tinto publishes scopes of work on its web portal and has regular workshops for local business.
3.66
Councillor Long said Woodside was not focusing on local procurement but mentioned a company called BBI which was using a procurement portal with great success. He said changes to local procurement are happening but it needs to go further.
Barriers to local procurement
3.67
A significant number of submissions dealt with the barriers to procurement faced by small and medium enterprises. The barriers fall into these areas:
centralisation of mining company offices away from the regions where the company operates;
complex tendering processes;
loose definitions of ‘local’ used by mining companies;
infrastructure issues of the regions;
lack of local industry capacity; and
Centralisation of mining company offices
3.68
Many witnesses suggested centralisation of mining company offices in larger cities had affected local procurement for SMEs in regional areas.
3.69
Mr Gary Scanlan from the Greater Whitsunday Alliance Ltd said employees charged with local procurement often don’t live locally, and procurement is often done through automated systems.
3.70
Mrs Adrienne Rourke from Resource Industry Network stated that major mining houses and large contracting companies moved their offices back to capital cities during the mining downturn. The Resource Industry Network submitted:
The ability for local businesses to understand who to speak to and how to connect with the right people is hampered under these arrangements, thus creating a regional location disadvantage.
3.71
Mr Angus Russel from the Rockhampton Regional Council proposed that: ‘some degree of decentralisation … by mining and contracting companies may serve to better connect them with local and regional businesses.’
3.72
Ms Reid noted that procurement decisions were sometimes even made internationally, such as in London, Bangalore or Brussels. She also claimed that local procurement teams often do not choose to contract with local businesses.
3.73
The issue of centralisation is not just a problem in Queensland. Mr Peters from the Northern Territory Chamber of Commerce stated that four out of the five mines in Central Australia have their headquarters interstate and project offices in capital cities, which makes it difficult for local business to infiltrate supply chains.
3.74
Mr Peters said that procurement managers far removed from the community are less able to understand the social impact of local procurement, and their only consideration becomes financial.
3.75
Mr Simon Vigliante from the Mackay Region Chamber of Commerce reinforced this, saying that:
…if that particular procurement officer or finance manager had his son or daughter playing soccer on a Saturday morning beside an employee that just got laid off because of that decision, all of a sudden the accountability is very real; it’s in your face.
3.76
CE Smith & Co Chartered Accountants argued that companies doing business in regional areas should be required to have offices in those areas.
3.77
In response to questioning on this issue, BHP said it has an office in Mackay at the Haypoint terminal, but the head office is in Melbourne. BHP also has offices in Brisbane and Perth closer to its assets.
3.78
The General Manager of Haypoint for BHP, Mr Sean Milfull gave evidence that he spent a lot of time in Mackay working with the local community.
3.79
Mayor Andrew Hope from the Liverpool Plains Shire Council said there was no presence of the major mining companies within the shire area. BHP did have an office while they were doing exploration but that is no longer within that Council area.
3.80
On the other hand, Whitehaven Coal has a regional office based in Gunnedah in New South Wales, as well as having an office in Sydney. Mr Flynn said having a physical presence in town made it easier to attract people into working with the company and engage with the community.
3.81
Mr Galilee pointed out that one of differences between the NSW mining industry and other states is the close proximity of mining projects to local communities. Most of the mining companies that operate in Hunter Valley have an office in Newcastle and some have offices in Singleton and Muswellbrook.
3.82
Mr Pitt from Glencore said the company values its local presence, having its coal operations head office at Bulga, near Singleton, a Newcastle office for its shared services facilities, and several other smaller offices.
Tender processes
3.83
Numerous submissions mentioned mining company tendering processes and requirements as a particular barrier to local businesses working with mining companies. The size and complexity of requests for tender were an impediment for smaller businesses looking to work with mining companies.
3.84
Mr Scanlan from the Greater Whitsunday Alliance said if large tender packages were broken down into multiple smaller packages then smaller local businesses would have more access to the work.
3.85
Mr Scanlan also said that the complexity and short time frames for responding to tender packages were a barrier. Tender packages offered by mining companies can be between 250 and 400 pages long. Many small businesses lack the expertise and resources to respond to such complex documents in a short period of time.
3.86
The Isaac Regional Council reported that 25 per cent of businesses considered short turnaround times on the tendering process a major difficulty when tendering with the mining industry. They also stated that 60 per cent of businesses require three months’ notice ‘in order to confidently participate in the procurement process’.
3.87
The Greater Whitsunday Alliance argued that pre-qualification and online procurement portals are complex and costly, with little return on the investment for SMEs, who generally reported receiving little to no work from them.
3.88
Mr Graham McGarry, from Beacon Minerals Ltd and Mangelsdorf Engineeering Pty Ltd, said that Mangelsdorf was a business with over 30 years’ experience in Western Australia but they would not provide services to BHP or Rio Tinto due to how hard it is to comply with their rules.
3.89
Another issue with the tender process that Ms Reid mentioned was the need to repeat documentation. She gave the example of a Brisbane-based company that was required to complete the same on-boarding paperwork for all 14 contracts they started with the same mining company. SMEs often lack the administrative capacity to perform this work.
3.90
The Hunter Business Chamber stated that a major barrier for local business is the lack of consistency in documentation between different mining companies.
3.91
In its submission, the Isaac Regional Council stated that SMEs do not have the resources to monitor all of the sources for tender that may be available. Within the Isaac Region, BHP’s C-Res program has helped with this issue, but C-Res is a program open only to small businesses and only for tender opportunities for BHP, BMA and BMC.
3.92
The Isaac Regional Council said advance notice of tendering opportunities should be included as part of the Environment Impact Statement/Social Impact Statement processes, so businesses had time to prepare and ‘be shovel or supply chain ready’.
3.93
Ms Hasleby stated that Roy Hill could help smaller local companies through the process if they need it.
3.94
Mr Mark Schubert of Origin Energy talked about Origin’s new policy of moving away from tier 1 contractors by ‘unbundling’ contracts in order to make the work more accessible for smaller businesses. He said this creates more contractors for Origin to deal with but brings the contracting relationship closer to the company.
Definitions of ‘local’
3.95
A further barrier to the procurement process for SMEs was the broad definition of the term ‘local’ by large mining companies.
3.96
In its submission, the Greater Whitsunday Alliance explained the issue and how it effects local businesses:
Broadly, the mining sector commits to local industry participation strategies, plans and or policies. However, under the definition of “local industry” in the strategies, plans and policies the local industry is most often formally defined as “Australian and New Zealand small and medium-sized enterprises (SMEs)”. By pursuing such a broad definition of “local industry” dilutes the direct benefits of the mining sector in regional areas.
3.97
Mayor Williamson stated that most large mining companies define ‘local’ as ‘Australia and New Zealand’ when referring to procurement from SMEs.
3.98
This was echoed by Cessnock City Council which listed the definition of local as one of the greatest barriers to use of regional businesses. The Council suggested ‘local’ should be defined as the local government area of the project, and then expanded if local businesses cannot supply the needs of the project.
3.99
Ms Porter from C-Res stated that its definition of local is ‘our BHP footprint’ and conceded that the definition of local is loosely applied.
3.100
Mr Scanlan pointed out that even under the federal government’s Industry Participation Plans, local is defined widely enough to include small businesses from Australia and New Zealand. He went to say that he would like a ‘true regional geographic’ definition of local procurement.
3.101
The Resource Industry Network said the Queensland Government’s 2017 procurement strategy, Backing Queensland Jobs, is a model that should be followed by the mining industry. This model divides the definition of ‘local content’ into five zones:
Local Zone 1: prioritised suppliers within a 125km radius of the place where goods and services are to be supplied;
Local Zone 2: the local region. If a supplier cannot be found within Zone 1, then suppliers within the local region should be considered;
Local Zone 3: Queensland. If suppliers cannot be found within Zone 1 or 2 then suppliers within all of the State will be considered; and
Local Zone 4: Australia. If suppliers in Zones 1, 2, and 3 cannot be found then suppliers in all of Australia will be considered.
3.102
Mayor Long said under Western Australian law, a company becomes a ‘local contractor’ if they establish an office in a regional area and stay there for six months. This has led to the practice of large companies establishing offices in regional areas to take advantage of future work as a ‘local contractor’. He said the French company Sodexo has done this in the Pilbara.
3.103
Mr Sundeep Singh of BHP said about 10 per cent of its procurement spending is with ‘true local’ businesses in Australia and it is working to increase this number.
3.104
Anglo American stated that it is currently redefining its definition of local to align with the Queensland Procurement Policy’s local zones.
3.105
Peabody Energy defines ‘local’ as the local government area of its operations. Due to its decentralised procurement model, Peabody has high levels of local procurement spending.
Infrastructure issues
3.106
Absent or substandard infrastructure in regional areas also represented a barrier to the use of local businesses by the mining industry. Infrastructure issues raised in evidence included:
A lack of banking and financial services, reliable transport and communication infrastructure for SMEs conducting business.
Damaged or inadequate roads, such as the Capricorn Highway in the Rockhampton area, which has been damaged by road trains and drive-in-drive-out traffic.
Inadequate and expensive air services in the Rockhampton/Mackay region, for both passengers and freight.
Lack of digital connectivity.
Electricity and telecommunications infrastructure in need of upgrading in the Liverpool Plains region.
Local industry capacity
3.107
The lack of capacity of local industries is also a barrier to local procurement by mining companies described by both local organisations and mining companies.
3.108
Cessnock City Council listed the stringency of requirements in the following areas as barriers to SMEs becoming part of resource company supply chains:
3.109
Cessnock City Council submitted that SMEs often lack the funds to employ experts in these areas.
3.110
Mayor Hope said there were significant costs in getting the right accreditation and maintaining certifications. He suggested government subsidies are needed.
3.111
The Sustainable Minerals Institute submitted:
Resource companies frequently note that local and regional SMEs lack the capacity to meet their stringent quality standards. Where this relates to issues such as workmanship standards, OHS standards and other technical performance standards, their concerns are justified. In such cases there is potential for training providers, business support agencies and industry bodies to offer capacity-building initiatives.
3.112
The Institute also said that Indigenous businesses are often helped to build their capacity and this assistance should be extended to other SMEs to increase local procurement.
3.113
Ms Reid asserted that the lack of consistency of mining industry policies, rules and procedures was a barrier and that it costs $20,000 to $25,000 to induct a new employee to work with mines.
3.114
Mr Bill McKenzie of the Kalgoorlie-Boulder Chamber of Commerce and Industry gave evidence that the organisation runs ‘Business Local,’ a training program to educate small businesses on mining company requirements.
3.115
Origin Energy submitted that building business capacity in this area is critical to the ability of SMEs to work with the resource sector.
3.116
The NSW Mineral Council has a policy to work with local chambers of commerce to hold information sessions about the procurement process.
Other issues
3.117
The Committee received evidence of various other matters which limit the use of local businesses by mining companies in the supply chain. These included:
distance and remoteness of the mine site;
a belief among mining companies that local SMEs are too expensive and cannot complete the work;
possible clash of mining companies and the social and cultural expectations of Aboriginal owned businesses;
the financial limitations Aboriginal owned businesses, such as poor credit history and lack of a business guarantor;
the highly competitive marketplace of the resource industry; and
lack of innovation and customer focus of SMEs.
3.118
ConocoPhillips stated that a barrier to using more local suppliers was reluctance on the part of the SMEs to change in order to meet the needs of the sector and, further, the risk-averse nature of smaller businesses.
3.119
ConocoPhillips said further:
… there is often an expectation that because a potential supplier is based locally, they should be preferentially treated even when their contract bids are uncompetitive or do not meet safety standards.
Increasing local procurement
3.120
The Committee received many suggestions and recommendations for increasing local procurement. Some of this evidence outlined ways various organisations are attempting to increase local procurement themselves while others recommended federal government intervention.
Current Programs
3.121
The Local Government Association of Queensland (LGAQ) referred to the Queensland Resources Council’s Resources and Energy Sector Code of Practice for Local Content (the QRC Code) which seeks to assist resource companies to increase local procurement. The LGAQ welcomed the QRC Code but noted that it had several issues:
it does not identify a minimum standard for achieving SME participation;
the definition of local is ‘either an Australian or New Zealand’ business;
the code is a ‘voluntary self-regulatory regime’ with no consequences for non-compliance;
the code doesn’t clarify if it also applies to workers camps, principal contractors or other sub-contractors; and
there is no independent person or group who assesses complaints against the industry for not complying with the Code.
3.122
Mayor Baker recommended that the QRC Code be amended as follows:
that local content is made mandatory;
that a local and regional nuance is added to the code; and
that the code requires local content practices for tier 1 and 2 contractors.
3.123
The Department of Infrastructure, Regional Development and Cities (DIRDC) cited the Regional Development Australia (RDA) Committees program, which, although not specifically related to mining procurement, assists local businesses in regional areas.
3.124
DIRDC stated many RDA Committees work with Auslndustry, Austrade and the Department of Jobs and Small Business to strengthen local SMEs to take part in the mining sector through their supply chain.
3.125
The Resource Industry Network gave evidence about the Queensland Local Content Leaders Network, a group of local government, industry and economic development representatives from the Bowen, Galilee and Surat regions that work together to help local businesses improve capacity to join mining supply chains.
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Local Councils also reported requiring companies to meet local content targets. Rockhampton Regional Council said that it and the Central Highlands Regional Council have a loading for local content.
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The City of Kalgoorlie-Boulder stated that the Goldfields-Esperance Development Commission had appointed a Local Content Adviser for the region to promote opportunities for local business with government and mining companies. The Local Content Advisor will discuss with mining companies procurement departments:
mining companies barriers to purchasing local products or services;
providing education programs about the opportunities and benefits in local procurement for mining companies and local enterprises;
development of a capabilities register for local SMEs; and
funding opportunities for suppliers.
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The Rockhampton Regional Council created the ‘Gear Up Rocky’ initiative, which delivers briefings and training courses to help local SMEs engage with complex mining sector tender process.
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The Hunter Business Chamber stated that industry networks such as HunterNet have a positive role to play in helping local SMEs interact with the mining industry. HunterNet assists businesses in the Hunter Valley region network with mining companies, by providing training and business development programs and informing them of upcoming tendering opportunities. The Chamber said further that Government should support existing initiatives.
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There is an existing legislative requirement for major projects such as mines to use Australian businesses for procurement. This is dictated by the Australian Industry Participation National Framework and captured by the Australian Jobs Act 2013 (Cth). Among other things, this legislation requires major projects of $500 million or more to provide opportunity for Australian industry to bid to supply key goods and services. However, neither the Act nor the framework, specify any requirements for regional procurement.
Recommendations from witnesses
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The Association of Mining and Energy Related Councils recommended that:
state and federal government implement incentive-based procurement strategies to encourage local purchasing;
the federal government require mining companies to source their goods, services and workers from local communities ‘to the extent practicable’;
the federal government require that mining companies work with local businesses and councils to enhance the capability of local enterprises;
mining companies be required to provide their prequalification requirements for tenders well in advance so local SMEs would be better prepared to tender for work packages; and
the federal government assist local SMEs to obtain quality assurance certification and improve telecommunications infrastructure in regional areas.
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The Resource Industry Network also made recommendations about how the government can support local businesses in regional areas:
require government funded programs to provide opportunities to businesses in regional areas to participate and learn from them;
encourage industry events to be held in regional centres in alternate years through sponsorship or financial support;
incentivise companies to move their offices to regional centres;
change the definition of ‘local’ to reflect ‘what “the pub test” or a “reasonable person” might consider to be local’.
request that mining companies and major contractors release local content reports on a site-by-site basis, so their spend and gaps can be seen by communities and the groups can then work together to fill the needs of the companies.
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Mr Vigliante stated that legislated local content requirements would provide some certainty to local businesses and remind mining companies of their obligations to the community.
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Mr Carter from the Port Hedland Chamber of Commerce said it would help local communities if more manufacturing for the mining industry was done within Australia, and if there was more communication between mining companies and local chambers of commerce. He added; there is a tendency for large mining companies to ‘forget about the small guy’.
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Mr Stuart Fleming from Lakes Electrical Distribution in Kalgoorlie recommended incentives and tax benefits for mining companies that use local businesses for procurement, arguing that this would encourage mining companies to use local subcontractors rather than flying people in from other states.
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The LGAQ recommended the federal government lead the development of a national code to set out minimum standards aimed at increasing access for regional SMEs to resource project supply chains. The code would set benchmarks and include requirements for reporting.
Committee comment
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Local procurement plays a critical role in the economies of regional areas. It often represents one of the main ways a regional town benefits from a mining asset in their region.
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There are flow-on effects of local procurement that go beyond just immediate economic gain. A healthy relationship between regional businesses and a mining company can lead to expansion and diversification of the economy beyond merely supplying to the mine. This is important for the resilience of the community during times of mining downturn.
Local procurement policies and practices
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The Committee notes the evidence provided by mining companies about their local procurements policies and plans. However, most large mining companies have no more than 10 per cent true local (regional) procurement, and their potential for local procurement is limited by their preference for engaging large tier 1 and tier 2 contractors for the majority of their work.
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For example, 80 per cent of BHP’s procurement spend is with tier 1 and 2 contractors but BHP does not require those contractors to demonstrate local spend or provide local procurement policies. BHP argues this would be legally and practically unenforceable, but the Committee is not convinced.
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The Committee notes that Origin Energy has started requiring its tier 1 and 2 contractors to provide details of their local procurement plans, and to make commitments to regional and Indigenous procurement. Origin has achieved this in three recent contracts and intends to continue this approach, suggesting it can be done.
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The Committee also acknowledges the work of companies that are ‘unbundling’ major contracts into several smaller contracts in order to give local businesses more opportunity to contract with them. Other large mining and resources companies should look at unbundling their contracts to increase the opportunity they provide in the regions.
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BHP’s Local Buying Program, run through independent company C-Res, was identified throughout the inquiry as ‘best practice’ in local procurement. The Committee agreed that the Local Buying Program helps BHP engage more effectively with small regional businesses.
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However, the Local Buying Program is severely limited as it only applies to very small businesses, generally with less than 20 employees, and it is only available to businesses contracting directly with BHP and its subsidiaries.
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To be a more effective vehicle for increasing local procurement, the Local Buying Program would need to expand to incorporate medium sized regional businesses and be accessible to those that contract through BHP’s tier 1 and 2 contractors.
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Despite the limitations of BHP’s Local Buying Program, other mining companies should look to the C-Res model and consider if a similar structure may boost their local procurement.
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The Committee also acknowledges the good work being done by many mining companies regarding Indigenous procurement. For instance, Rio Tinto and Fortescue Metals Group have significant policies and practices in place that are boosting Indigenous procurement.
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However, the Committee is concerned that the focus on small and Indigenous businesses (particularly the very restrictive definitions of small business being used) allows many larger small businesses, and regional medium sized businesses, to fall through the cracks.
Centralisation of mining company offices
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The Committee notes most mining companies have their head offices and procurement teams in major metropolitan cities. This separates the mining company from the community, reduces visibility of local businesses, and distances the company from its accountability to the communities where its assets lie.
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The Committee believes having procurement teams on the ground in communities would boost local procurement and help harness the available capacity of local SMEs. Companies with local offices, including Whitehaven and Glencore Coal, had higher levels of local procurement.
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Companies don’t have to relocate their head office to a regional town, but the Committee suggests that having a locally-based procurement team, with the authority to make purchasing decisions, would go a long way towards increasing local procurement.
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The Committee urges mining companies to reinstate a meaningful physical presence in mining towns and regions. Companies should use these offices to promote the mining sector, encourage locals to join the workforce, advertise procurement opportunities, and engage with community concerns.
Definition of local
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The Committee was concerned to hear that, in some cases ‘local procurement’ was being defined as including any Australian and New Zealand business, for instance, in the Queensland Resources Council’s Resources and Energy Sector Code of Practice for Local Content (the QRC Code).
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This leads to difficulties in reporting and enumerating levels of actual local procurement and fails to act as incentive to procure goods and services from regional businesses.
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The Committee believes a consistent definition of ‘local’ should be applied by mining companies and governments at all levels to ensure local procurement can be meaningfully measured in future. The Queensland Government’s 2017 Local Procurement Strategy, which defines four concentric zones for local procurement, provides a good model. The local zones are:
Local Zone 1 – the vicinity of the mine – includes suppliers within a 125km radius of the place where goods and services are to be supplied;
Local Zone 2 – the local region – if a supplier cannot be found within Zone 1, then suppliers within the local region should be considered;
Local Zone 3 – the State – if suppliers cannot be found within Zone 1 or 2 then suppliers within all of the State will be considered; and
Local Zone 4 – Australia – if suppliers cannot be found in Zones 1, 2, and 3 then suppliers in all of Australia will be considered.
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It should be noted that the issue of local procurement was brought up repeatedly in Queensland, but appeared to be less of a concern in New South Wales, probably due to the relative closeness of mining assets to the communities they operate in.
Complexity of tender processes
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The Committee was concerned that so many local SMEs reported great difficulty in engaging with the mining industry’s tendering processes.
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Mining companies need to work together to simplify their processes and make health and safety accreditation, and other tendering requirements, consistent across the industry. Peak industry bodies like the Minerals Council of Australia have a role to play in encouraging the use of uniform processes for tendering among their members and in the industry at large.
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All mining companies should provide a local contact person to assist local SMEs through the tendering process. The Committee notes that Roy Hill currently has a dedicated advisory person for its Indigenous procurement program. The Committee would like to see this role expanded to all small businesses seeking to tender with Roy Hill.
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The Committee applauds local councils and industry groups that are proactively seeking to increase local procurement through educating local businesses, promoting local products and engaging with mining companies.
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In particular, the Committee commends the work of HunterNet and the Resource Industry Network for their work improving business capacity and attempting to connect local business with the resources industry. The federal government must continue to provide support for these kinds of initiatives.
Regulating local procurement
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The Committee believes that the capacity for local procurement is different for every mine project. Some mines are located near to sizable towns, where there are businesses that either already have the capacity to service the mine, or could develop it. The companies operating those mines should have significant local procurement targets, in the order of 20 to 30 per cent of appropriate goods and services.
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Companies with mines near towns should also seek to grow their local procurement by boosting local industry capacity over time.
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The Committee acknowledges that some mines are very remote. Companies with very remote mines will have less opportunity to engage local businesses to provide goods and services, and have less of a responsibility for building capacity in local regions. However, these companies should not overlook regional towns located in the same state as the mine, and should not look immediately to metropolitan cities to seek suppliers.
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For the above reasons, the Committee does not support the idea of legislation to regulate specific targets for local procurement. However, the Committee believes state and territory and local governments should incorporate context-specific local content requirements into their agreements with mining companies.
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The Committee also supports industry initiatives to boost local procurement, such as the QRC Code. However, the Committee believes the QRC Code is inherently flawed, because it defines local as any Australian or New Zealand business.
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The Committee strongly suggests the Minerals Council of Australia and the Australian Petroleum Production and Exploration Association adopt meaningful local content codes nationally. The codes should define ‘local procurement’ to mean procuring goods and services from businesses permanently based in regional, rural and remote areas near to mine sites.
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The Code should also set out best practices in relation to advertising and promoting local procurement opportunities to make them more accessible to local small and medium enterprises. Contract opportunities should be advertised for at least 30 days in an accessible location, such as the company’s website, and should be presented in a simple format to create a more even playing field for small regional businesses completing with larger companies.
Recommendations
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The Committee recommends the Federal Government work with state, territory and local governments, and land councils, who make licensing agreements with companies to ensure these agreements:
include targets for minimum levels of true local procurement, based on the specific circumstances of the region and the project, including regional business capability;
clearly define ‘local’, using the Queensland Government’s Local Zones model, or a similar model;
require companies to make procurement opportunities readily available and accessible to regional small and medium enterprises and locally-based businesses of any size, and to advertise their contracts and tenders for at least 30 days; and
require companies to ensure their higher-tier contractors also commit to local procurement.
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The Committee recommends the Federal Government work with local governments and land councils to produce high-quality, accessible guidance materials for use by local councils and land councils in mining regions. These materials would help councillors to:
negotiate effectively with mining and resources companies when setting up or reviewing agreements;
maximise rates receipts and other compensation from mining and resources companies active in their local government area;
secure commitments to minimum levels of local workforce participation, training and apprenticeships;
negotiate guarantees around local procurement policies and processes; and
develop a clear action plan and guarantee of adequate funding for rehabilitation, clean-up and community sustainability projects as mining retracts.
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The Committee recommends the Federal Government review the mechanisms in place to support regional small and medium enterprises and locally-based businesses of any size to engage with the mining sector.
The review should identify any additional supports that need to be made available to ensure regional businesses have the skills and capacity to:
find out about opportunities in the mining and resources sectors;
negotiate effectively with mining and resources companies;
secure and maintain the necessary accreditations; and
complete tender processes effectively and efficiently.