Sharing benefits for greater stability

Mining companies face increasing demands from developing nations for a bigger share of the wealth they create, writes Kathryn Hopkins

Since the worst financial crisis in living memory struck almost five years ago, economists have repeatedly predicted a robust global economic recovery. The problem, however, is that one has so far failed to materialise.

Policymakers have warned that there will be more twists and turns before we get back to full health, and in its latest appraisal of the global economy, the World Bank says a recovery remains “fragile and uncertain”.

But while no one can deny the mining sector has been affected by the downturn, it is still relatively successful compared to other industries and this is perhaps why it is more important now than ever that these companies carefully consider the issue of “sharing the benefits”.

Developing countries last year recorded their slowest economic growth rates of the past decade and of the 60 resource-rich developing and transition economies that miners often operate in, an estimated 1.5 billion people living in them survive on less than $2 a day.

Governments, employees, local communities and suppliers in developing nations feel they are entitled to a greater proportion of value created by mining firms

It is for this very reason that governments, employees, local communities and suppliers in these nations have started to feel they are entitled to a greater proportion of value created by mining firms. In particular, they believe that mining companies should take on a role of greater support and responsibility to the country in which it is operating.

Governments, for example, now have greater expectations of mining and metals companies to be involved in broader community development, including social infrastructure, skills development, community health improvements and local procurement practices, according to a report by Ernst & Young. Local communities, meanwhile, are no longer looking for a basic economic return for hosting a project, but are expecting to benefit economically and socially.

With an industry-wide skills shortage as leverage, many employees at mining companies are also trying to seek pay increases. This has been most prominent, so far, in Chile, Peru, Indonesia and Zambia.

“This has forced companies to balance the expectations and the needs of their many stakeholders. When they fail to do so, it results in strikes, supply disruptions, shareholder activism and governments using their power to achieve their portion through resource nationalism,” says Mike Elliott, global mining and metals leader, at Ernst & Young.

There are many issues to be addressed when considering the “sharing the benefits” model. For example, many of the stakeholders, who want an increased share of the mining and metals profits, are not taking on additional risk for this increased return, says Mr Elliott. This means the companies are being forced to take on the increased risk with reduced returns.

One solution is to use foundations, trusts, and funds (FTFs) as vehicles for sharing the benefits of mining operations with the surrounding communities, which the World Bank believes, when done properly, can be good instruments.

But whatever the best solution is for everyone involved, it is vital companies should ensure sufficient resources are focused on stakeholder engagement and developing a proper understanding of host communities as early as possible.

As the World Economic Forum says in its responsible mineral development initiative: “Effective early engagement with communities, addressing concerns and providing support to governments where appropriate, will yield considerable stability benefits.”