A social license is essential for success in the era of resource nationalism
Posted on May 8, 2013
After the lost decades of the 1980s and 1990s came the mining boom of the past decade and along with it — the beginning of the ‘Commodities Super-Cycle’.
The Commodities Super-Cycle has since fuelled increased mining activity across the globe. It has also given rise to the most important trend facing mining: economic nationalism.
No Country is Immune
This phenomenon can be observed in post-industrial economies as well as in emerging ones. It crosses all political lines. No country is immune.
Governments, under pressure from their exchequers and populations, want increased and – perhaps more problematically – immediate economic benefits from mining.
The long period of sustained high prices for minerals and metals has greatly increased expectations. Mining companies and governments are struggling to achieve the right balance between competing interests.
The question of the day is how to predictably and fairly share income among various stakeholders: governments, mining communities, mining companies, their shareholders and employees. This is a very difficult question and there is no one-size-fits-all solution.
Why It’s Complex
Mining projects are endeavours of long gestation. They can take 10 years or more between discovery and commissioning. What’s more, mining companies invest a large amount of money early, but have multi-decade payback horizons. Naturally, they require stable legal and tax environments in order to attract project capital. Easier said than done.
Governments are subject to shorter-term pressures. Their budgets are yearly affairs. Employees and local communities are impatient, and politicians are at the mercy of electoral cycles. This doesn’t jibe with the tax-receipt profile of mining projects, which is predominantly back-ended; that is to say, governments receive the bulk of taxes and other charges many years after a project is commissioned and any debt has been repayed.
This dissonance has led to friction between mining companies looking for long-term stability and governments dealing with short-term pressures. While nations have considerable leverage they must nonetheless walk a fine line.
Countries must be mindful not to kill the golden goose, while at the same time avoiding the so-called race to the bottom. After all, governments compete with each other to attract mining projects, and mining companies can shop for the most favourable jurisdiction.
How to Mitigate Risk
Economic or resource nationalism — the means by which governments extract value from their resources — is not limited to raising taxes. Other instruments include governmental or local ownership, benchmark export pricing, minimum in-country transformation, and export restrictions to ensure supply to local industry.
“Resource nationalism is one of the main causes of the current commodity prices instability and it is threatening global security,” said London-based Chatham House, in its Dec. 2012 Resources Futures report.
How can mining companies mitigate risks posed by economic nationalism? One of the best strategies is for mining companies to have a strong “social licence”. A social licence may be defined as the acceptance or – better still – the approval of the community adjacent to a project. A strong social licence is not only effective against governmental overreach, but it can also serve as an effective anti-corruption mechanism.
A social licence has to be earned and maintained. This is best achieved through multi-stakeholder dialogues, local economic involvement, good environmental performance and social inclusion. Medical clinics, schools, roads, power plants, irrigation dams and water treatment plants are some of the types of projects carried out by mining companies as part of their social licence.