Why it’s key to an effective mining risk strategy
Many mining companies have a published and/or well-structured Social Economic Development (SED) strategy. Some will include it under their sustainability strategy, others as part of their Social License to Operate (SLO) initiative. But irrespective of where it sits, having a program which assists in improving the economic potential of nearby communities and local stakeholders results in a symbiotic partnership that benefits both the company and the community. Whilst such work is ongoing throughout the lifetime of any mining asset, it is after a major loss that many of the benefits of an effective SED strategy begin to play out.
To understand some of the social challenges faced by mining companies in more detail, not just those that emerge as a result of a loss, Willis Towers Watson’s Tom Holliday (TH) spoke to Andrei Belyi and Monica Coutinho de Souza of TechnoServe1, a not-for-profit organization that has been at the forefront of implementing economic development strategies for over 50 years.
TH – Monica and Andrei, many thanks for taking the time to talk to us today and allowing us a brief insight into some of the work you are doing with various mining companies around the world. Many mining firms already have well-developed and articulated socio-economic development strategies, so how does TechnoServe support the mining industry today?
TechnoServe – Mining company assets tend to require significant workforces and are often located in remote and isolated parts of the world. These areas usually offer only limited resources from the local communities; indeed, many gaps exist in technical capacities, be they soft skills, management skills or technical skills. There is therefore a huge potential for economic improvement by building local skills and developing entrepreneurship capacity. We provide solutions for small business owners in three different ways; through training, such as technical training, business and financial management, etc; through facilitating access for these entrepreneurs to better markets; and by facilitating access to funding and capital.
TH – Does this work focus exclusively on skills that can be used in the mining industry?
TechnoServe – No, and this is a critical part of developing sustainable economic solutions in the mining communities. Local entrepreneurs need to have as broad a view as possible, to allow their enterprises to prosper without reliance on mining companies. This is particularly relevant in situations after the mine has closed down and so local people are not dependent wholly on the mine as a source of revenue. There can sometimes be a perception that a mining company is a new “godfather”, with the ability to offer gifts and build new facilities. But there needs to be an effective long-term economic management of the asset that can often conflict with short-term immediate needs. Through the royalties and taxes that an organization pays, there is also a crucial role for the government in the development of these areas, so the mining company is just another “actor” in a complex economic ecosystem, albeit an important one at the very centre.
TH – Local communities rightly sit high up on the list of stakeholders for a mining operation and play an important part in their ability to carry out operations. But conversely, how important can the mining companies themselves be to the local communities?
TechnoServe – We see a full range of dependencies. Some operations are close to thriving cities and obviously in such cases there is a lower reliance on the local mine operations and a better balance of power, for want of a better expression. But there are others at the opposite extreme, with limited rural economies and poor capability of local “actors” such as local governments, who might not have necessary skills to support local economic needs, and whose population is very dependent on the mine - these are complex environments. The mining company, in its efforts to develop its Social License to Operate (SLO), will build new roads, schools, hospitals, etc, so there is often a significant expectation of a direct and immediate benefit. But there should be a more long-term strategic approach which perhaps sits alongside the immediate needs; to develop economies and markets, to encourage entrepreneurship and to ensure non-dependence on the mining operations.
We work with some of the world’s largest mining companies and we jointly design and implement programs aimed, among other objectives, to support local small and medium-sized enterprises (SMEs) to grow. For example, one of these programs might help a small company not only to be a supplier to the mine but also to branch out and service non-mining markets. We will also work to build local capacity of public services providers, for example working with the mayor’s offices and technical schools to help reduce youth unemployment.
TH – Compensation can come in different forms, for example providing training. But typically, in the aftermath of major catastrophes, we hear talk of direct compensation for affected individuals and families. Does this bring with it further challenges?
TechnoServe – A good question, and one which carries with it many sensitivities. Compensation is part of the solution, absolutely, but you’re right in that compensation comes in various forms. As mentioned earlier, TechnoServe and the mining companies can provide training which is not linked to any catastrophe or loss. But this can also take the form of highly value-added training, bespoke to their industry and designed specifically for their business. This training might last 6 to 9 months, it might involve 5 or 6 training sessions and be far more impactful than university or government-run courses; it’s also designed to provide the small business with a robust foundation on which to succeed. Many mining companies also have a grant program, in which they provide a monetary grant to these businesses; however, this can sometimes distort incentives. We have seen over many years that the training and education provide real long-term advantages, whereas we’ve also seen that the simple handing-out of grants, whilst perhaps quick and easy, often doesn’t have the desired effect. The communities themselves want to be successful, they want to develop themselves and they are seeing that the tools which our training provides can help them with that. And mining companies are now starting to understand this themselves; for example, we are seeing situations in which grants are being phased out and replaced with loans or even disappearing altogether. But this is not an easy change to make; removing a financial benefit is painful at the start, but the initial pain naturally falls away as the value becomes more apparent.
TH – And so the challenges of post-loss compensation must be even more complex?
TechnoServe – Yes, when you talk of compensation after an environmental or industrial loss, that is equally complex - if not more so - and it’s important to strike a balance. First of all, companies must understand that a community’s suffering runs much deeper than money, and they should act with sensitivity towards those who may be processing a lot of emotional pain. Secondly, of course, companies should do the critical work of improving their operations to ensure that they are doing as much as possible to prevent similar disasters in the future.
But to address the issue of financial compensation - simply giving money away rarely works, although it may help to manage the immediate emotions that the local community may feel. The problems really start when you stop the compensation payments. If the main breadwinner in the family earns, say, US$400 per month and a major event happens, it can be that each individual in the family is compensated at, say, US$300 per month. So that same family may have their household income increased 3, 4 or 5-fold, and that brings with it its own challenges when the payments stop - unless the community members have learned how to develop their own sustainable sources of income.
TH – Over the last few years, we’ve seen some high-profile losses affecting mining companies worldwide; for example, there have been at least five major tailings dam failures since Mount Polley in August 2014, which clearly have had an enormous impact downstream, both socially and environmentally. What are the key challenges that communities experience, and that you experience working within those groups, aside from the obvious difficulties families face with tragic bereavements?
TechnoServe – Again acknowledging the importance of the emotional and social factors in these situations, the risk of creating a financial dependency from compensation is a big challenge. When there has been an impact on household income, compensation is usually paid out very soon after an event and may continue for years. This can create a dependency; while it may make people better off in the short term, in the long term it can actually be detrimental to the community.
For example, prices go up as shopkeepers know that families, and the community in general, have more money; the cost for services likewise increases. Traffic increases as people from nearby towns come to sell their goods and services, hoping to benefit from the higher prices. Contractors and suppliers fill hotels, which increase their rates as a result. So there are some areas which will clearly improve from the compensation and it is therefore difficult to try to convince community members that compensation is not a sustainable solution.
Furthermore, there are downsides such as local inflationary effects; some sectors are impacted negatively, such as certain tourism businesses, and they largely end up going bankrupt. Of course, eventually the compensation stops. If people have been receiving money whilst not working, then two years down the line, when the financial aid comes to an end, there are significant problems to address. Crime can even increase at this point as a result of families’ efforts to maintain their lifestyle, as they face higher costs of living without this previous income source.
TH – Clearly there is a broad range of how successfully mining companies are currently aligning themselves with their communities, from the very good down to those with significant issues still in front of them. If there were such a thing as a ‘top 3’, what would be your top recommendations for a positive and mutually beneficial relationship between a mining company and their local stakeholders?
TechnoServe – We get asked this question a lot, and the short answer is there is no simple solution and no quick fix. Each environment is profoundly unique, and each project or operation needs to look at its specific circumstances. But in general terms, firstly you have to keep to a long-term strategy; it’s easier to look at the short-term and sometimes take the easier option, but over many years we have seen the benefits that a long-term strategy brings. Secondly, you have to maintain that strategy, which might sound straightforward, but over time there are many actors who will come into play and you need to ignore pressure from external bodies and keep to a more systemic approach to what you implemented at the outset. And thirdly, in everything you do, build a trustful relationship. When there is a major global company talking to a small local enterprise, it is easy to come across as arrogant or not interested. You have to be having the right conversation at the right level, building a trustful relationship that will last.
TH – Andrei, Monica, that’s been a fantastic conversation. Clearly when talking about risk management in its fullest context, managers and their teams need to be looking at the wider picture and not just the risk of the enterprise in its operations, but also to the downstream risk to the enterprise, and the deep relationships and activities that need to be built and developed not just for short-term accomplishment, but for real and sustainable long-term progress. Both of you, thank you very much.
Andrei Belyi is Regional Vice President, Latin America and the Caribbean at TechnoServe.
Monica Coutinho de Souza is Country Manager Brazil at TechnoServe.
Tom Holliday is LatAm Reginal Industry Leader for Mining, Willis Towers Watson.
1 https://www.technoserve.org/
