December 2015

Integrating social and environmental aspects in project design

  • By G Corder, Principal Research Fellow, Centre for Social Responsibility in Mining, Sustainable Minerals Institute, University of Queensland; D Kemp, Associate Professor, Centre for Social Responsibility in Mining, Sustainable Minerals Institute, University of Queensland; D Brereton, Professor, Director of People Centres, Sustainable Minerals Institute, University of Queensland; P Bangerter, Senior Consultant, Sustainability Associate, Hatch Brisbane

Reconsidering the way community, environmental and social issues are incorporated into planning

The mining industry has faced strong opposition to major projects in recent years. Several significant projects have been delayed or ‘shelved’ due to community, environmental or social impact opposition. Responsible companies have made efforts to involve social and environmental specialists in project reviews and project design toll-gating processes. However, by the time of their involvement, technical design decisions have often been made and engagement is limited to mitigation and communication strategies.

Early integration of social and environmental considerations into project planning remains a major challenge for the industry. The prevailing approach to mine planning and design suggests that project developers are primarily concerned with:

  • maximising the amount of ore that can be extracted and processed economically
  • minimising technical risk (eg of a tailings facility collapsing or process technology failing)
  • using proven technologies
  • containing capital cost and maximising return on investment
  • ensuring that the project is net present value (NPV) positive.

Social considerations are not disregarded altogether, but mainly manifest as constraints imposed by the regulatory process, rather than as objectives in their own right (eg ‘minimise harm’, ‘maximise social benefit’). Similarly, environmental considerations are often addressed at a later stage in project planning, after the key design decisions have been made.

This article discusses the potential for alternative approaches that build social and environmental considerations into the design process and is based on a workshop held at the Sustainable Minerals Institute (SMI) at the University of Queensland in late 2014. The participants comprised researchers and industry professionals. A primary aim of the workshop was to capture key ideas on alternative approaches that could address the future challenges and opportunities facing the industry in developing prospective mining projects.

Social and environmental impacts on project development

Social and environmental issues or conflicts are significantly affecting the delivery of projects. EY’s Business Risks Reports over the last three years (EY, 2013; EY, 2014; EY, 2015) have included social licence to operate in the top five risks to the mining and metals industry. Moreover, Davis and Franks (2014) concluded that conflict with local communities resulted in lost productivity due to temporary shutdowns or delays which translated, for a mining project with capital expenditure of between US$3-5 billion, to costs of roughly US$20 million per week of delayed production in NPV terms.

Social conflicts and potential environmental threats, when they arise, are typically manifested at the early stages of project development and often continue, frequently escalating, as the project progresses. These conflicts impact on capital costs in the project phase, and operating costs and productivity in the production phase. Complicating this is the recent trend to larger mega projects, in particular bigger projects in smaller countries where the actual or projected revenue accounts for a significant component of national GDP. Such an example is the Simandou Project in Guinea. On the other hand, smaller projects are easier to get to the operational phase but can create uncertainty with communities when the project goes to an expansion phase. To put these issues into context, a 2012 study reported that regional average cost overruns were highest in South America at 64 per cent, followed by North America at  51 per cent, and then Australia at 40 per cent (Deloitte, 2012). Delays, as much as rising input costs, are causing increasing capital costs.

Another major constraint for projects, particularly in the current financial environment, is the sensitivity to financing. Given that under normal circumstances roughly only one project in 40 becomes an operation, companies aim to minimise upfront costs as much as possible. This is acutely true due to the current lack of capital.

Barrick’s Pascua Lama project on the border of Chile and Argentina and Newmont’s Conga project in Peru are both examples that have suffered major cost problems due chiefly to social and/or environmental issues (Els, 2014; Jamasmie, 2014). By comparison Rio Tinto’s La Granja project and Anglo American’s Quellaveco project attempted integrated approaches to project development and worked more closely with local communities and stakeholders, albeit not without their own individual challenges (Flynn and Vergara, 2015; Jamasmie, 2015).

Current project development processes

Proposing alternative approaches that build social and environmental considerations into the design process initially requires an understanding of
the current project development process, as well as identifying areas for potential change.

In the project development world – largely dominated by engineering companies – individual projects, especially large projects, gain a ‘momentum’ that is driven by the key project personnel. Project managers, understandably, tend to focus on the positive aspects of the project and are typically keen to ensure the project progresses, in no small degree due to the fact that project success or otherwise can be ‘career defining’.

Because of the sensitivity to capital costs, a capital risk profile is routinely developed to estimate the necessary contingency relative to the base capital estimate. Historically this contingency has not included risks related to social, community and environmental issues and even today this is still rarely included. As a project progresses through subsequent tollgates, the engineering certainty increases and accordingly provision for contingency decreases, even though there may still be high levels of uncertainty around social, community and environmental aspects of the project.

Managing the development of projects varies, often depending on the size of the project proponent’s company. Major mining companies typically will manage the project, splitting the scope and subcontract-specific areas. This approach can prevent the easy flow of information and data between specific areas – for instance the technical design team will not be aware of local community issues for which there could be a design solution, such as reducing dust impacts by different blasting approaches or community concerns of water discharges that could be mitigated by enhanced treatment processes. Junior companies are less prone to this scope splitting and often prefer a complete engineering, procurement and construction management(EPCM) package, although they do not typically have the finances to commission an upfront integrated analysis that could result in saving capital costs in later project development phases.

Another complicating issue is that although technical teams of engineering companies generally understand design factors affecting individual projects, they do not necessarily understand the complexities of the countries in which their projects and operations are situated. Cultural issues in some countries are sometimes at odds with company culture or policies and therefore the company needs to manage this appropriately.

Tight schedules and budgets for engineering companies also contribute to ‘project momentum’ and create a level of resistance to introducing new approaches that do not have a clearly defined value-add, or a proven track-record in delivering beneficial outcomes. In addition, there can also be a perception that focusing on social, community or environmental issues will cost, delay or even potentially suspend the project and therefore is often resisted by the project manager and team.

Alternative integrated design approaches

As current approaches to new project development are well entrenched, wholesale changes are impractical in the short-term. Nevertheless, it is possible
to modify project development approaches to better account for mounting concerns related to social and or environmental issues.

Typically mining companies have routinely analysed social and environmental aspects on a project-by-project basis. Often this is done without sharing their baseline analyses beyond fulfilling their statutory requirements by publishing information and data in an Environment (and Social) Impact Assessment (ESIA). Given that many of the social and environmental issues are regional or country dependent, consolidation of relevant contextual information and data related to projects in a common region or country would provide a valuable resource not only for new project proponents to the region, but importantly, impacted stakeholders, such as governments and local communities. Furthermore, such a resource would assist in assessing cumulative impacts across a region as well as enabling ESIAs to be conducted at a strategic regional level to determine the project characteristics that would have the best ‘fit’ for both project proponents and stakeholders.

Introducing project objectives that support the values or benefits that communities or local stakeholders can bring to a project is another possible approach for better integration. In numerous cases, an initial difference in positions between the project proponent and stakeholders, which ultimately was resolved, has produced examples of good community, social or environmental initiatives associated with mining projects. By adopting a measured proactive approach that includes establishing additional project objectives to create value for stakeholders, project proponents could alleviate potential issues before they have a serious impact on project schedule or capital.

Project assessment still relies heavily on NVP for decision making, even though there are other recognised critical factors that affect the viability of a mining project. Creating flexibility or adaptability in the project development process can help to better manage these other factors. For instance, an approach that balances the trade-off between NPV estimation and social and environmental impacts (positive and negative) to evaluate several project options would produce a more realistic business analysis. Being able to systematically assess the difference between a project option with a higher NPV estimate and higher social risk profile with an alternative option with a lower NPV estimate and lower social risk profile would be highly valuable for decision-makers. An example could be deciding whether to spend more on dust control to reduce the impact on local communities and thereby reduce likelihood of community issues affecting project development process or operational production.

While incorporating social and environmental issues into NPV analysis in some situations is possible, often the results are inconclusive due to the assumptions around the quantification of these issues. One potential way forward is to routinely adopt risk-assessment of social issues using quantitative risk assessment (QRA), which commonly is used by project developers to estimate impact of risks to project schedule and cost. In a similar vein, experts on local social and community issues relating to the project under consideration could input estimates of the likelihood of the impact on capital costs, operating costs, or NPV into the QRA process. By such a practice, threats are discovered and mitigated earlier and opportunities rise to prominence in time for adoption. Contingencies are thus reduced due to the improved certainty in project outcomes.

Moving towards integrated design approaches

While alternative integrated design approaches might appear to provide a better way forward, there needs to be a convincing and evidence-based justification for moving away from the existing paradigm – namely a value proposition for change. One way of supporting such changes is through creating a suite of suitable case studies from different mining regions around the world. These case studies should demonstrate, in a rigorous way, the financial and other benefits of factoring social and environmental aspects into the design stage.

Given the potential for mixed or confusing messages to local communities, there needs to be a better understanding of the local community context and an improved ability to communicate complex technical details on project development. Mining companies also need to be robust enough to manage and engage with government bodies and other groups – such as non-government organisations (NGOs) – on the technical aspects of projects.

An authentic and proper account of risks and uncertainties is necessary to deliver a more robust and resilient project that will have better acceptance from the local community and the broader society. Existing mechanisms such as the JORC code, which are used for informing investors or potential investors and their advisors, could be expanded to include a fuller and more complete analysis of environmental and social issues and factors. Incorporating such information would provide investors with a more accurate picture of the business case for a new mining project development. 

References

Davis R and Franks D M, 2014. Costs of Company-Community Conflict in the Extractive Sector. [Online]. Corporate Social Responsibility Initiative Report No. 66. Cambridge, MA: Harvard Kennedy School. Available: www.csrm.uq.edu.au/publications/costs-of-company-community-conflict-in-the-extractive-sector.

Deloitte, 2012. Tracking the trends 2013: The top 10 issues mining companies may face in the coming year [Online]. Available: www2.deloitte.com/content/dam/Deloitte/ca/Documents/international-business/ca-en-ib-tracking-the-trends-2013.pdf.

Els F, 2014. Barrick mothballs Pascua-Lama [Online]. Available: www.mining.com/barrick-mothballs-pascua-lama-72606/ [Accessed 6 October 2015].

EY, 2013. Business risks facing mining and metals 2013-2014 [Online]. Available: Designing and configuring the Next Mine.docx.

EY, 2014. Business risks facing mining and metals 2014-2015 [Online]. Available: Designing and configuring the Next Mine.docx.

EY, 2015. Business risks facing mining and metals 2015-2016 [Online]. Available: www.ey.com/Publication/vwLUAssets/EY-business-risks-in-mining-and-metals-2015-2016/$FILE/EY-business-risks-in-mining-and-metals-2015-2016.pdf.

Flynn S and Vergara L, 2015. Land Access & Resettlement Planning at La Granja. Available: www.csrm.uq.edu.au/publications/land-access-resettlement-planning-at-la-granja [Accessed 6 October 2015].

Jamasmie C, 2014. Newmont’s Conga mine could remain halted until 2018 [Online]. Available: www.mining.com/newmonts-conga-mine-could-remain-halted-until-2018-93678/ [Accessed 6 October 2015].

Jamasmie C, 2015. Anglo American drops Peru copper project [Online]. Available: www.mining.com/anglo-american-drops-peru-copper-project/ [Accessed 6 October 2015].

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