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How should mining companies invest in social capital during economic downturns?

For the past three years, I have been one of the instructors in the Advanced Social Management Program for AngloAmerican Corporation, a major global mining company. The program is managed by the University of Cambridge Institute for Sustainability Leadership and involves two separate intensive masterclasses in South Africa and Chile and a six month group project period in between.

The project group whom I tutored this year, prepared a very timely internal report on how the mining industry should manage their social investment during downturn in commodity prices. This is a serious issue in cases where communities become dependent on mineral investment for employment or business clientele. The following article summarizes some of the key findings of this report based on interviews and literature research undertaken by the group.

The authors of the report were all  staff from AngloAmerican (and subsidiary companies such as DeBeers):  Mia Gous (Chile), Nerys John (DeBeers – London), Carolina Manfrin (Brazil), Lynda Pollock (Australia), Adriana Rodrigues (Brazil), Juan Carlos Roman (Chile), Daphney Tshehla (South Africa)

 

The resource community cycle and recent trends in the management of major resource extraction projects (Figure Adapted from Taylor N, Goodrich C, Fitzgerald G, McClintock W. Undertaking longitudinal research. In: Becker H, Vanclay F, editors. The International Handbook of Social Impact Assessment: conceptual and methodological advances. Cheltenham, UK: Edward Elgar; 2003. p. 13–25.)
The resource community cycle and recent trends in the management of major resource extraction projects (Figure Adapted from Taylor N, Goodrich C, Fitzgerald G, McClintock W. Undertaking longitudinal research. In: Becker H, Vanclay F, editors. The International Handbook of Social Impact Assessment: conceptual and methodological advances. Cheltenham, UK: Edward
Elgar; 2003. p. 13–25.)

 

The challenges in mining, as a resource extraction industry, are not only those imposed by the market (technology improvement to reach better productivity reducing costs and therefore maintaining/increasing profitability), but also extended to the environmental and social aspects of the communities impacted by its activity. Establishing a mining project can take billions of dollars but also several years of investment in community engagement and building trust with communities. During commodity downturns the trust established with communities is acutely tested because the pressure to cut costs often means a reduction of direct benefits to communities. Managing expectations and retaining community engagement during such times requires a range of approaches.

Public-private partnerships of various kinds can provide a buffer during downturns. A good example of such a relationship is that of the Rossing Foundation in Namibia, established 36 years ago by Rossing Uranium and focuses on education and Small and Medium Enterprise (SME) development in conjunction with the foundation partners which include the Ministry of Mines and Energy, the Ministry of Education, Arts and Culture, the Ministry of Higher Education, Training and Innovation, the National Institute for Educational Development, amongst others.

Corporate partnerships at a regional levels with other companies can also help. In the coal-rich Bowen Basin of Australia, community relations practitioners from all the mining companies in the region have formed a working group (including Vale, BHP and AngloAmerican) to jointly look at the needs of the local communities and to identify projects that might be jointly funded. This joint approach has helped to ensure that in the downturn no one area of community needs will be overlooked and that the limited company resources that are available can be stretched further.

Partnerships with philanthropic foundations have also worked for some mining companies during downturns. Allison Coppel, currently the group executive for social responsibility for Newmont noted the significance of such efforts in an interview to the research team. In a previous job, based in Peru, Allison’s budget was suddenly cut by 40% in a downturn, which led her to creatively seek partnership with existing community development projects that were financed by private foundations and development donors. Such alliances helped to bring forth synergies and actually made the delivery of social development more efficient.

The establishment of a fund from within the company’s more profitable revenue years is another approach to ensure social development budgets remain robust during downturns. This approach would entail a global fund to be established from which social and economic development projects could be undertaken during lean years.  The different Business Units within the company would submit a portion of their profits to the fund and during downturn years, the fund can assist with projects that have a high risk of losing the “social license to operate.” Such an approach was used by Xtrata corporation in Chile before its merger/acquisition by Glencore.

Buffering funds for social investment can also be legislated by governments. In the Australian state of New South Wales, under the Development Approval legislation, applicants are required to enter into agreements with local governments to address potential impacts of development projects. Driven by local government these Voluntary Planning Agreements (VPA) have in practice evolved into “de facto approval conditions.” The amounts involved in these agreements are determined based on “Run-of-Mine” (ROM) tonnes and are in place for the life of the mine. Funds raised in this manner from mining companies are used to address development impacts such as maintain and improve infrastructure and a large percentage of it is dispersed as a community fund. Rio Tinto in New South Wales’ Hunter Valley has VPAs with local government and has community funds established that are managed by community, company and local government representatives.  They are currently rolling out similar agreements at their Heavy Mineral Sands operations in Richards Bay, South Africa.

VPAs are not unanimously supported by the mining industry in Australia mainly because, as in the New South Wales context, they have become very similar to conditions of development approval and not at all voluntary. In some cases the local government is in total control of the funds raised though the VPA and the mining company has little control over how and where the money is spent. VPAs do however provide some certainty that funds will be available to address mining impacts and socio-economic development activities throughout the life of the mine including during industry downturns and improvements in the agreement making process.

At the end of the day, communities cannot be left in the lurch because of commodity downturns. Dependence and vulnerability need to be effectively managed as a collective obligation from development agents whether they be private or public in nature. The current slump in commodity prices and the response of industry to community needs, particularly in the developing world, should be studied for more effective internal planning within companies as well as externally by governments and civil society organizations.