As confidence returns to commodity markets, investors face new political and stakeholder dynamics.
By Rob Foulkes, Associate Director
After years cutting discretionary spending, parts of the mining sector may be starting to see ‘green shoots’ in exploration and acquisition activity.
But the world has moved on in the years since the end of the supercycle, and the external pressures facing miners will be different to those of the 2000s. The experience of the boom – and its abrupt end – have reshaped stakeholders’ attitudes to the sector. If and when a new phase of growth begins, companies will need to be prepared for a different landscape.
It is a complicated time for governments in resource-dependent countries as they navigate their relations with multinational mining companies.
Scarce investment dollars have prompted some pro-business reforms
A basic but powerful consideration is the scarcity of investment dollars and the need to work harder to attract companies. This has resulted in regulatory and business-environment reforms, and in some cases more attractive fiscal terms.
Argentina, for example, has in the past year removed currency controls, restrictions on imports, and export duties on precious and base metals, as part of broader efforts to reverse the nationalist economic policy of former president Cristina Fernandez de Kirchner.
A sense of missed opportunity during the last boom has fuelled these reforms in many countries: Kenya’s new pro-business mining act was in part a reaction to the country’s failure to attract the same level of investment as its neighbours in the 2000s.
Elsewhere governments are squeezing investors to make up for budget shortfalls
At the same time, lower commodity prices and reduced investment have put heavy pressure on resource-rich governments to raise revenues and boost employment. Mining companies may bear the brunt of this even while they themselves are under growing commercial pressure.
There may be few alternative sources of tax revenues or, in countries where the population did not see sustainable benefits from the previous boom, squeezing mining investors may have a strong political appeal.
Gold companies in Ghana, for example, have faced unpredictable tax increases in recent years that have threatened to render some mines unviable, while Tanzania’s president cited the view that companies paid insufficient tax in the past to justify an increasingly assertive stance towards the sector.
Power is shifting to the sub-national level
A second shift has been in the relative importance of national versus provincial or district authorities.
In countries from the Philippines to Peru, there is now greater control over the sector and more allocation of benefits at the sub-national level. This trend has been underway for years, but has been accelerated by a perception that national governments failed to make full use of the opportunity of the 2000s.
In many countries, local-level opposition to mining was driven by a sense that the affected regions bore the impacts but received little in return, as revenues collected by central government were mismanaged or distributed elsewhere.
Decentralised regulatory and licensing authority, and more funds earmarked for regional authorities, have been seen as a way to correct the balance.
The trend presents new opportunities for companies, particularly in opening up scope for closer relationships with affected stakeholders and more direct contribution to the socio-economic development of the regions where they operate.
Experienced authorities in regions with a history of mining (such as Katanga province, DRC, or Salta in Argentina) can also protect investors from challenges at the national level. However, in many cases, companies have found that sub-national authorities lack the capacity to effectively regulate the sector or manage the associated revenues. And the additional layer of stakeholder engagement – often mired in rivalries and tensions between a region and the capital – can further complicate an already complex set of relationships.
The downturn has dented community trust in investors
Thirdly, companies may also find that their interactions with local communities take place in a different and potentially more suspicious atmosphere since the end of the supercycle.
The jobs, contracts, social investment and indirect economic contributions made by mining companies in the boom years did not always prevent local tensions from breaking out, but they did frequently provide the underpinning for functioning relationships.
The experience of withdrawals and cutbacks has done much to dent communities’ trust in investors’ commitments, and in many places this will colour engagement for years to come.
In South Africa, for example, amid myriad other causes, the political fallout of huge redundancies in mining communities has been contributing to pressure for a mandated community development contribution based on a proportion of revenues – a measure seen by the industry as regressive and a threat to already unprofitable mines.
The outlook for stakeholder relations: 2017 and beyond
As the sector begins to contemplate a potential return to growth it will need to be prepared for these new considerations in the stakeholder environment. Host countries will continue to welcome investment, but companies will face additional suspicion, complexity and a political climate in which governments and communities are determined to avoid repeating the perceived failures and missed opportunities of the past boom.
To achieve a more trusting and constructive atmosphere in the next growth phase, companies and stakeholders will need to reach closer agreement in advance on what a viable, mutually beneficial industry would look like.