Establishing a positive and lasting relationship between mine companies and communities through economic empowerment

As a result of a livelihood program supported by Base Titanium Ltd, a Kenyan farmer is able to make more money, feed their family and support their children in school. In return, by including the community – giving them purpose and providing them the tools to get themselves out of poverty – a mining company’s community development program will be more likely to succeed.

Being economically empowered is one of the core indicators of positive life. One theory which explains this is Maslow’s hierarchy of needs – a motivational theory in psychology describing the needs that drive human behaviour (Figure 1). A well-thought-out livelihood program triggers esteem needs: the need for respect, self-esteem and self-confidence. Esteem needs are the basis for the human desire we all have to be accepted and valued by others. Without fulfilling esteem needs, we have feelings of inferiority and negativity regarding our lives.

Picture yourself as a 25-year-old man living in a developing country who has had little to no education. The odds can often feel stacked up against you. If you can earn a living, provide for yourself and your young family, and have a voice in civil affairs, then you feel you are on a trajectory to exit poverty. If not, and there is a mine built near your community and you are not experiencing any positive benefits from the operation, you are likely to act adversely to the operation. Economic empowerment impacts all other positive outcomes in life – providing food for the family, putting children into school, accessing water and sanitation, etc.

It’s well documented that a mining company’s activities and behaviours concerning a community play a fundamental role in determining a local community’s support of a particular mine and the quality of the relationship. The cost of community conflict for ‘a major, world-class mining project with a capital expenditure between US$3-5 billion will suffer costs of roughly US$20 million per week of delayed production in net present value terms, largely due to lost sales’ (Davis and Franks, 2014).

With mines often being situated in extremely poor regions where there is little to no economic opportunity, there is naturally a significant community expectation for a mine to solve entrenched development problems. Mines raise significant funds for local economies; however, during the life of the mine, there can be tensions involving the distribution of mining revenue in a country between local and national levels. This is often because tax revenue generated from mines is usually transferred to the national treasury and sometimes little is invested locally.

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It is integral for a mining operation to have strong amicable local community relations, otherwise operations are at risk of closure. A mine typically faces five community risks:

  1. the company gifts infrastructure and equipment to communities during construction, creating a trailing liability to continue making gifts for decades to come
  2. bored young men in the immediate mine region shut off mine assets on a regular basis
  3. a significant population move to the immediate mine region, resulting in social unrest
  4. cost of goods and services rise as a result of a proportion of the community having higher income while the remainder lives off the same income (Dutch disease), causing unrest
  5. a real or perceived environmental accident occurs and the community moves to close the mine.

All five events have resulted in high costs to the project’s owner. Examples of where these events have occurred include Freeport (Freeport-McMoRan Inc), Porgera (Barrick) and more recently Samarco (BHP).

After trust is broken, support can almost never be bought. We have seen this with Newmont Mining Corporation, the world’s second-largest gold miner, which has walked away from its $5 billion Conga copper and gold project in Peru after a year of relentless community opposition. Furthermore, if a mining company’s reputation is tarnished, it can take a significant amount of time to restore credibility and possibly reduce the ability to organise mining licences in other countries.

EY’s Business Risks Facing Mining and Metals 2014-15 report listed social licence to operate as the third-biggest risk a mine can face. The challenge for operators is balancing immediate community demands and the ‘inherent value in being a socially and environmentally reliable operator with controlling costs, lost production time, reputational damage and overflow impacts to other operations’.

How can mining companies mitigate this? Andrew Hocking, Group Manager Community at MMG Ltd, has said that MMG works at the local level through social development to contribute to achieve development goals on important issues such as poverty, food security, health, education and the wellbeing of women and girls. He notes that over time, as the mining operations and the areas the company operates in mature, the company looks to transition its approach from supporting these essentials for life to focus on long-term economic development not solely reliant on MMG or mining. MMG wants to work with communities to be resilient and sustainable beyond the life of its mines.

Similarly, Ron Brew, Manager Social Responsibility at Newcrest Mining, said the company understands the importance of going beyond mere compensation and developing programs that address the basic needs of a community, without building up dependency or by assuming the role of government in areas such as health and education.

Programs are more likely to be sustainable if the mine investment is the catalyst to build up other non-mining income sources. As a result, communities are able to develop independently from the mine and are less likely to move back on poverty indicators once the mine closes. An important way of achieving this is to foster market linkages between communities and external partners.

This has been successfully executed by partnerships broker Business for Development, an NGO which works together with the resource sector to develop livelihood programs with smallholder farmers using an inclusive business framework.

What does that mean for mines and their community development programs? Many of the world’s leading mining companies operate in rural areas in close proximity to farming communities. One-third of the world’s 7.3 billion people are smallholder farmers. These people are some of the poorest on earth. About 90 per cent of farmers lack strong, consistent relationships with buyers, and access to finance, inputs, agronomic training and other support. One of the key barriers holding them back is a lack of knowledge on how to improve the efficiency and quality of their product, plus access to markets. As a result, the majority of them are subsistence farmers.

Buyers, on the other hand – like Cadbury, Unilever or Nestlé who are looking for raw product like cocoa and cassava – want a supply base where large volumes, standardised procedures, minimal management requirements and secure sources of supply combine to minimise the cost of raw materials. Having reached the limit of arable land worldwide, many of the world’s biggest food and agribusinesses are looking at how to increase yields on land already being cultivated. Given that more than half of all farmland is cultivated by smallholder farmers, they are increasingly seen as the solution for transforming the way the world manages the new global food and agribusiness paradigm.

Often many mining companies see community engagement as a necessary means to an end. A community can be an external risk if not engaged properly. From a buyer’s perspective like Cadbury, a smallholder farmer and their community is an opportunity for a new supply chain. By partnering and creating market linkages, a sustainable livelihood program is created that has cross-sector value for all three stakeholders (Figure 2).

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Through forming several inclusive business partnerships with the resource sector – in Kenya with Base Titanium and Cotton On Group, in Laos with MMG and Ironbark Citrus, and in PNG with Oil Search and a Highlands Piggery – Business for Development has refined an inclusive business model called LINC (Long-term Inclusive Commercial Enterprise) which mediates the interests of smallholder farmers and buyers. Central to the success of the LINC is the support of key partners including mining companies who benefit from the LINC.

A LINC is an independent, financially sustainable social business established to create opportunities for farmers and meet the needs of buyers. As the LINC supports farmer productivity and sells product to buyers, profit is held in trust for the exclusive purpose of community benefit. Farmers are 100 per cent beneficiary owners of the LINC model, while the buyer and investors are part of the governance structure.

Throughout the development and nurture of the LINC, brokers like Business for Development nurture the partnerships and ensure mutual benefit is achieved. From there, it is possible to propose that other possible partners, such as multilateral donors, invest in the inclusive business. This is all done with the view to scale-up. Once the program is running successfully, further investment from outside sources is no longer required as the LINC is self-reliant, community needs are met and sustainability is achieved.

Case study

Crop: Cotton

Country: Kenya

Company: Cotton On Group, clothing retail

Target Income: $1500 pa

Farmers: 10 000 by 2020

Status: 300 farmers trading cotton.

Base Titanium (Base) started operations in Kwale, Kenya in 2013, and it is committed to working with communities to improve living standards and livelihood opportunities. Base engaged Business for Development to design a community development program that will outlast the life of the mine. Business for Development worked to find a buyer partner, in this case Cotton On Group (an Australian multinational clothing company), to pilot a program that purchases cotton sourced directly from farmers near Base’s mine in Kwale.

How are smallholder farmers engaged?

The Kwale cotton program is designed to encourage a step change in thinking amongst the farmers on how they prepare their land and the crop options available to them, and provide an understanding of farming inputs to drive a greater focus on yields and the preparing of soil so they can increase planting density. As a result and in the long term, these farmers have the potential to go from growing sufficient corn to meet their daily food needs to providing a commercial crop, cotton, to an international market and thus create income-earning potential.

For food security purposes, the whole farm is not dedicated to cotton, but it is encouraged that a field is used and then rotated. This also ensures there is not too much dependence on cotton for income, and other parts of the land are able to be used for ‘food to table’ cropping.

Impact and outcomes

In terms of life cycle, this partnership has proven to work and is now scaling-up for cotton production. Further research has been undertaken to consider other agricultural opportunities, for example, potato off-take partner for snack manufacturing.

As such, a collaborative partnership has been formed to undertake truly transformative work with farmers. In a time frame of five years, this program is seeking to be self-sustaining. This means, with appropriate structure, a livelihood micro-economy has been established which will outlast the mine and seeks to have ongoing impact for thousands of members of the Kwale community for decades to come. As a result, shared value is attained.

Conclusion

Implementing the LINC process can be complex, but it is a long-term, sustainable and effective solution. As a result, risks are reduced significantly because:

Unlike corporate philanthropy and corporate social responsibility, which are primarily driven by ethical considerations and a desire to minimise impacts and enhance reputation, inclusive business addresses development challenges through core business activities. By not providing a gift to a community, the mining company is less likely to create a trailing liability. All the investments proposed create businesses and livelihood opportunities for farmers.

All programs set out to create new high-value income opportunities for households in the impact zone. It seeks to keep young men active and creates real opportunities for them to improve their livelihood and establish their standing in the community without creating unrest.

The programs seek to include not just the villages near the mine, but the full zone from which migration toward the project is likely to occur. These businesses will slow in-migration by building prosperity across the zone, reducing the incentive to relocate toward the mine.

Through enabling farmers to increase their income, more people within the impact zone will be able to afford increased prices as a result of the mining injection. The multiplier effect can also ensue within the region.

Through developing inclusive businesses, a mining company’s reputation will be cemented at both a government and village level as a catalyst for improving livelihoods both now and for future generations. This reputation acts as ‘social insurance’ should an accident occur. Being respected, understood and open is the best defence when issues arise.

Most mining companies advise they are committed to the wellbeing of the communities impacted by their projects and the development of the region where they operate. The practicality of converting this concept to reality is, as many mining companies know, not easy. Why do we do it? Beyond pure license to operate, it is about making a difference, consulting the community to understand their needs, and giving them the opportunity to have a sustainable livelihood so that they can exit extreme poverty.  

Article Published in AUSIMM Bulletin 

References

Davis R and Franks D, 2014. Costs of Company-Community Conflict in the Extractive Sector. Harvard Kennedy School.

EY, 2014. Business Risks Facing Mining and Metals 2014-2015. Available online http://www.ey.com/Publication/vwLUAssets/EY-Business-risks-facing-mining-and-metals-2014%E2%80%932015/$FILE/EY-Business-risks-facing-mining-and-metals-2014%E2%80%932015.pdf

Goldman L, 2014. ‘Direct-to-Farmer Finance: Business models for serving the hardest-to-reach smallholders’. Available online http://dalberg.com/blog/?p=3247

Henisz W J, Dorobantu S and Nartey L J, 2013. ‘Spinning gold: The financial returns to stakeholder engagement’. Strat Mgmt J, 35: 1727–1748. doi:10.1002/smj.2180