Another view on the economy of minerals

June 17th, 2010

We need to rethink the traditional relationship between industrial resource extraction and local development, writes Transparency International’s François Valérian.

Photograph by Chance Agrella

Our traditional approach to the link between industrial exploitation of underground wealth and local development is fundamentally flawed. While there is ample recognition that industrial corporations have to help local development where they operate, the rationale behind such efforts is rarely articulated. Implicit rationale is most often to buy some kind of local peace through community investment. More theoretical and acceptable explanations make extensive use of the “sustainability” concept, but this concept is too broad to have a concrete efficacy, since it mainly refers to the duration of the industrial operation and could be used for the sole economic management of a non-renewable resource as well as for any long-lasting environmental impact. Another widely used concept is the one of “stakeholder”, one of the stakeholders of the mining operation being the local population, but even the concept of stakeholder is of poor use if we are not more precise on how we define the stake. Most definitions oppose the stake of a stakeholder to the share of shareholder, and therefore define the stakeholder in a negative manner, as a non-shareholder who has to somehow be taken care of. Generally speaking, all measures that refer to sustainable development or stakeholders’ interests are construed as corrective measures, external to the real transaction which is purely industrial and financial.

To the contrary, the economics of local development have to be fully reintroduced into the economics of industrial mining, so that a unified framework can be developed and used for all negotiation purposes. In most countries, with the notable exception of the US, the underground minerals belong to the state, and we have to start with this two-hundred year old French law concept to understand the issues at stake. Two major issues arise from this legal principle, which are the political compact between the state and the local population, and the economic agreement through which the state allows private interests to make economic use of that wealth.

The relationship between the local population and the underground wealth is problematic. One could argue that there should be no economic or legal relationship between them, since before successful exploration this wealth had often remained unknown to the population. This view is the classical view, which was also the colonial view, and we use here that term without the usual pejorative intent, simply to illustrate that the wealth could be used for the almost exclusive profit of its discoverer after some royalty payments to a central authority.

Social and environmental sciences have clearly established, though, the negative impacts that a mining exploitation could have on the local community. I will not come back to them; we all know that they range from water and soil pollution to HIV contamination through destruction of the traditional communities and families. Those impacts are commonly referred to as externalities, which have to be re-internalized in the economics of mining.

Exploitation of underground wealth goes with the exploitation of another wealth, which is formed by the local conditions of living, those conditions ranging from environment to health through social welfare. A ton of copper is only a ton of copper while it still lies underground. Once above earth, it becomes a ton of copper undergoing several chemical treatments and a share in the local population’s life. Hence a first conclusion, but also a question. Through the contract signed between the state and the mining company, the local population lends this share of its life to the mining company. But the question is how to evaluate this pound of flesh.

Let us stay on our first finding for a moment. We have identified an absent signatory to the mining contract, and we have also extended the company’s balance sheet to a new lender which is the local population, and new corporate assets which are some rights on the local population’s life. A number of conclusions derive from that and form as many elements for a negotiation framework.

First of all, we have a lender who does not sign the contract, which raises the issue of state legitimacy to represent the interests of the lending population. The more legitimate and accountable the state is, the more possible the inclusion of the local population can be, and we can immediately reverse the sentence. Doing mining business in a country, the government of which has poor legitimacy or accountability, is also ruling out from the very beginning any chances for inclusion of our absent lender.

Negotiating with an accountable government however is not enough, since the contract also has to be explicitly a lending contract in a particular form. Evaluation, conditions and interests of the loan have to be negotiated and stated. Evaluation is a difficult topic, since it has to assess numerous and long-lasting impacts. Only a few countries, unfortunately the more developed ones, require a comprehensive and detailed study on the environmental and social impacts of the exploitation prior to the contract grant. Such requirement is however crucial to long-term sustainability of local life, and should become regular practice in every mining country, with multilateral assistance for the study when needed. Local population has to be involved in the study, through appropriate political or civil society representation, and full results of the study have to be published. Any mining exploitation has to bring about empowerment of the local population, and should be used as a political opportunity to enhance representation of, and accountability to, this population.

Once the impact has been evaluated, conditions of the loan, ie mitigation of the impact has to be clearly defined. The mining contract has to make it clear that the mining grant is not a licence to do whatever it takes to bring up as much underground wealth as possible. Environmental protection, adequate closing conditions, security and safety, relationship with artisanal mining, as well as caps on annual production have to be defined, as well as the right balance between local and imported workforce.

Lastly, the interests of the loan have to be negotiated and included in the contract. Usually, payments to the state are of two different kinds. You find one-off payments, often called signing bonuses, which are a massive cash injection into the state’s budget. Benefit to the general population, and to the local population, is close to nil according to general experience. Signing bonuses are similar to sudden ingestion of an enormous amount of food. Very often, they fuel the diseases of the public body and end up wasted in individual offshore accounts. Very different are the long-term, regular contributions, ie royalties, taxes, shares in production, which should be substantial and serve the interests of the local population.

You will find an opposing view to regular contributions being substantial. Some argue that low tax and royalty requirements attract investment and help the country successfully compete with other countries, thus enhancing global revenue. The mistake here is that mining is not a commodity industry, investment choices are made on technical parameters and also on governance considerations, those considerations including transparency and fight against corruption. Tax and royalty payments do not form the key driver for an investment choice, but are of crucial importance to the local population, provided that this population becomes its share of them.

We are now back to the issues that we had mentioned at the beginning of our intervention, namely the compact between state and local population, and the contract between the state and the mining company. As well as the local population has to be explicitly recognized as a lender to the company, the government has to serve the interests of the local population, and has to provide it with the interests of the loan. The contract has to provide for corporate expenses for local development, but those expenses should not be an excuse for the state to stay absent and not spend locally. To the contrary, a mining contract also has to provide for part of the revenue to go back to sound local development.

Are we close to including the local population in the negotiation of all mining contracts? No. Is it a reason to leave the contracts behind the closed doors of negotiating rooms in a remote capital city? No. The local population, and the civil society as a whole, is entitled to know what financial amounts flow from the mining industry to the state. This is the much needed first step, a first step that we in Transparency International strongly encourage through our Promoting Revenue Transparency Project. Only transparent and accountable corporations, only transparent and accountable governments, will be in a position to invite the local population to the negotiation table.

Written by François Valérian

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