Transformations in mining techniques have the potential to change the way mining companies maintain their social licence to operate
In the coming years, automation will change the face of the mining industry. One of the biggest impacts is that we will see far fewer faces in mines. Technologies such as driverless trucks, autonomous long-distance haul trains, automated drilling and boring systems and semi-autonomous crushers are being steadily rolled out in new mining investments and are being retrofitted to existing mines. The mine of the future will be operated primarily from distant centralised control centres that rely on geographic information systems, GPS, autonomous equipment monitoring and programmable logic controllers.
The immediate implications, and the primary reasons for uptake, are that mine sites will be more efficient, will have lower greenhouse gas emissions and will suffer fewer workplace accidents. However, the mine of the future will also have fewer employees and lower spending on domestic procurement for items that are linked to employees and the new technologies. So what will this mean for the concepts of shared value and the social licence to operate in the sector?
The relationship between mining firms and the states and communities in which they operate is founded on a bargain, described by many as ‘shared value’ (Hidalgo et al, 2014). Firms are allowed to exploit scarce, non-renewable resources, with attendant environmental impacts, in return for their contributions to prosperity in the host states. These shared value contributions, especially those that manifest at the local level, are key to any firm’s social licence to operate.
A mining firm’s contributions to a host economy go well beyond the payment of taxes and royalties. For example, tax and royalty payments amounted to 12 per cent of Anglo American’s total spending in 2014 (Anglo American, 2015). By contrast, 43 per cent of its spending went to suppliers and 16 per cent to employees, which equated to just under 60 per cent of total company spending. When a significant portion of that spending occurs in the host communities and countries, it will have a much larger impact than tax and royalty payments direct to government (particularly if we consider indirect and induced impacts).
To explore these dynamics, we looked at actual spending figures supplied to us in confidence by two mining companies, one with operations in a high-income OECD country and the other located in a lower middle-income developing country (Cosbey et al, 2016). Both companies had annual budgets of between US$600 million and US$700 million.
Our analysis of their expenditure on supplies and employment revealed two key issues. First, spending within the host countries in these categories varied widely between the different countries. Second, when the implications of the new technologies are taken into account, host countries can expect to see significant drops of in-country spending by foreign mining companies – drops that may be significant enough to jeopardise the investor’s social licence to operate.
With respect to the first issue, local procurement amounted to 91 per cent of all procurement or 58 per cent of total operational expenditure in the high-income OECD operation. By contrast, the lower middle-income country operation procured only 21 per cent of its goods and services within the host country, which amounted to 12 per cent of its total operational expenses. Closing this local procurement gap has been an important focus of the shared value paradigm over the last decade, with numerous governments exploring new localisation regulations in contracts and laws.
Automation, however, may make this harder to achieve. New technologies are typically tied to overseas manufacturing and maintenance contracts that limit the potential contribution of local suppliers. It is also likely that developing country suppliers and labourers will not have the skill sets needed to work in the higher-technology environment, at least in the short and medium term. The capacity to control operations remotely also makes it possible for such controls to be centralised outside the host country, should that possibility make economic sense.
With respect to the second issue – contributions to the host economy – the study team itemised spending data to parse out those elements of local spending that would be affected by reducing employment and changing processes. The vulnerable categories of spending included items such as diesel, camp construction and operation, food, uniforms and human resources. We then generated three scenarios for workforce reductions as a result of technology improvements: 30, 50 and 70 per cent. These numbers are in line with existing analysis (Accenture, 2010; McNab et al, 2013; Frey and Osbourne, 2013).
Under these three scenarios, we found that local procurement was moderately but variably affected – it dropped by two to four per cent in the OECD mine and six to 11 per cent in the developing country mine. At absolute values of US$4.6-15.8 million, this would likely be significant at the level of the mine’s local operations.
We found larger impacts when we looked at the overall contribution of the mines to host economies. Here, we included not only domestic procurement, but also salaries and wages paid to nationals and the indirect and induced impacts from those two spending streams. We assumed that taxes and royalties would remain unchanged. In our three scenarios, the contribution to the host economy in the OECD case falls by 8.5-19.6 per cent, or up to US$213 million, as shown in Table 1. The corresponding figures for the developing country mine are 6.2-14.1 per cent, or a reduction of up to US$284 million. Note that these figures are much greater than the effects found when we looked at procurement-related impacts alone.
In the OECD country case, the three scenarios would result in an insignificant drop in GDP. However, the developing country is less diversified and smaller (not an atypical situation), which would imply a GDP drop of two to four per cent. As many resource-rich developing countries have multiple mining operations, the aggregate GDP impacts would be multiples higher.
In terms of jobs lost in the OECD country case, direct and indirect job losses in the three scenarios range from 1016 to 2372. In the developing country case, the range is 1530 to 3570. For the OECD government, this leads to losses in personal income tax revenues of US$31.7-74.0 million. In the developing country case, where both wages and income tax rates are lower, the corresponding losses are US$7.6-17.8 million. This represents a drop in total remittances to government (including taxes and royalties, which are assumed constant) of 25-58 per cent in the OECD case. In the developing country case, where wages and tax rates are lower and corporate taxes and royalties are higher, the drop was less significant at six to 15 per cent. These are all partial equilibrium figures that assume that the laid off workers do not find alternative employment.
These numbers are estimates based on data from only two mines and are subject to numerous caveats. However, if they are in the right ballpark, they point to broader concerns. For example, the results help us to think about the disparate impacts that technological progress might have on developing and developed country operations (though ultimately the significance will vary from case to case, depending on a number of variables such as age and type of operation). At first, it might seem as if the impacts would be more heavily felt in developed countries. After all, wages are higher in these countries, meaning that wage losses and reduced income tax revenues are also high and high wages mean stronger incentives to replace labour. Local procurement impacts are also higher since local spending tends to be a greater portion of total spending.
However, there are reasons to believe that developing countries will feel the social and economic development impacts more strongly than developed countries. First, most strategies for adapting to these types of changes are fiscally and technically demanding and are more likely to be successfully undertaken in developed countries. Second, more developing countries suffer from an acute overdependence on the extractives sector. Third, some of the types of technological change we surveyed will involve no net loss in employment, but simply a shift to higher-skilled employment. For those host countries that struggle to supply high-skilled labour, this will exacerbate the problem of the sourcing of foreign workers. Furthermore, even though wage levels are lower in developing countries, reducing employment there may serve other objectives such as addressing skills shortages or circumventing strong unions. Finally, though our analysis was unable to confirm this, it is likely that the mine of the future will involve decreased equipment-related procurement from local vendors as new, more complex operating systems are imported and serviced from abroad. This will likely include original purchases as well as long-term maintenance and repair. If so, the source countries for such imports, including ongoing maintenance contracts, are likely to be developed countries.
In closing, we return to the question we posed at the outset: what do these sorts of reduced contributions mean for the relationships between the host state, the community and the mining firm? How can mining make up for the drop in contributions to the host economies created by less local spending on employment and procurement and the increased inability to close the local purchasing gap? If the bargain is thrown off balance, it has implications for firms’ social licence to operate and, beyond that, for the willingness of host states to allow foreign investments in mining.
One answer is that taxes and royalties will likely increase with the increased profitability that follows automation, but governments may also be moved to raise the existing rates of taxation and royalties. They might also explore fiscal regimes that assess taxes dynamically in relation to profitability such as resource rent taxes or return-based, sliding-scale profit sharing arrangements. Though widely used in oil and gas fiscal regimes, these arrangements have only been sporadically attempted in the mining sector. By ensuring predictable flexibility, these fiscal mechanisms safeguard the stability of the investment while ensuring that companies assume lower risks in case of lower profits (resulting either from price decreases or cost increases) (van Meurs, 2016).
There will likely also be demands from host states for very different sorts of arrangements. There may be a focus on deriving benefits from other elements of the shared value paradigm, such as through requirements that mining-related infrastructure – roads, rail, captive power generation or communications infrastructure – be useful to the general public. Or there may be a push for firms to invest in beneficiation such as in-country refining, smelting and further downstream processing of extracted commodities. Governments might increasingly focus on transfer of knowledge or technology to domestic or state-owned firms, employing technology transfer or joint venture requirements. Or there may be a drive to encourage horizontal knowledge/technology spillovers to other sectors of the economy.
Alternatively, there may be increasing demands for state equity positions in mining firms. Or there may be a move away from the traditional concession model to greater state ownership of the resource, which might then be exploited through production-sharing agreements or fee-for-service contracts – arrangements that are common in the oil and gas and water sectors.
A failure of the shared value paradigm to deliver true shared value to host countries will likely drive governments to more deeply investigate these sorts of options. The shared value paradigm came about in part as a response to the rise of resource nationalism in the mid-2000s. The types of pressures we see on the paradigm will likely lead to further increases in resource nationalism to try and capture the full value for governments. While this may be more likely to be achieved for new investments, it is unlikely that existing investments will be fully immune.
Our research highlights the need for all stakeholders – government, firms and local communities – to understand the nature of the changes in the industry over the next few years and think about what sorts of arrangements might meet their respective needs going forward. With forethought and effort, the transition need not be conflictual and may pave the way to better outcomes all around.
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