The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™

The social license to operate in a new era of inequality: three levers extractives companies can use

Due to rising global inequality caused by the economic fallout from the covid-19 crisis and the accelerating transition towards automation, extractive companies will need to implement changes to the way they create socio-economic benefits, or shared value, for local stakeholders. This will help avert the risk that popular disaffection obstructs the development and operation of assets.  The largest proportions of local shared value are employment and local procurement. This current labour-based approach is likely to face strain as automation drives cuts to employment and procurement, while local needs simultaneously increase in the context of recession and cuts to government expenditure. This paper sets out three levers companies can use to protect the social license to operate in a new era of inequality.

By Caitlin Purdy, Senior Associate


The Challenge: The twin threats of inequality and automation

90 million people are at risk of extreme poverty due to Covid-19

Growing inequality and the transition to automation may present growing risks to the social license to operate. If these issues are not well managed, they may result in even stronger opposition to projects from communities and backlash from government.

The impact of the pandemic is increasing inequality globally and reversing progress made against key developmental benchmarks. Wage disparity has increased, global per capita income is falling, wealth inequality within developing economies is expected to rise and 90 million people are at risk of falling into extreme poverty. Local operating contexts will face pressure as unemployment rises and governments’ abilities to provision goods and services comes under strain, particularly as they reign in expenditure in response to huge fiscal deficits from pandemic stimulus packages and falling tax revenues. Socio-economic need and expectations of natural resource companies will inevitably rise.

Simultaneously, local jobs will be lost at the local level as companies accelerate the transition towards automation in response to economic pressures and social distancing requirements. The transition has already begun – Resolute Mining, a mid-cap gold company, deployed automated vehicles and drill equipment at its Syama mine in Mali, while Randgold and AngloGold Ashanti use robotic underground loaders at their joint-venture Kibali Mine in the DRC – and will only accelerate from here. A McKinsey Global Survey found that two-thirds of companies have sped up their adoption of automation and artificial intelligence because of the pandemic.[1] An estimated one in five jobs in the mining sector is at risk of being automated.

This will disproportionately impact project-affected communities. Shares of local employees are highest among low-skilled production occupations (e.g. drilling and service labourers, heavy equipment operators and underground mine labourers). These occupations are also the most vulnerable to disruption according to analysis by Canada’s Mining Industry Human Resources Council (MiHR).[2] By some estimates, autonomous remote operations could reduce underground workforces by up to 60%. Declining direct employment may also have knock-on effects for local procurement spending. Smaller workforces will lower demand for catering, laundry, and uniform services, which are among the easiest to procure from local communities.

Upskilling is not a pragmatic solution in many jurisdictions, at least not in the short term. Five countries ranking in the top ten on ICMM’s Mining Contribution Index (which measures the significance of the mining’s sectors contribution to national economies) have literacy rates below 50% – Burkina Faso, Guinea, Liberia, Mali and Sierra Leone. Significant chunks of these national workforces therefore lack the foundational skills necessary for re-training. The World Economic Forum estimates that only half of workers in the mining sector displaced by automation will be successfully redeployed. In some cases, they may move to the informal artisanal and small-scale mining (ASM) sector.

As communities start to feel the financial crunch driven by lower levels of local employment and decreased spending on local goods and services, companies may concurrently see their profit margins widen.  Shareholder gains are already high: among the largest 40 companies in 2019 they amounted to $55 billion, a 5-year high and up to 25% from 2018 according to analysis by PwC.[3] Automation-related advances have the potential to significantly lower production costs. Barrick aims to lower gold production costs below $700 per ounce using automated technology, while former BHP CEO Andrew McKenzie reported that a one percent improvement in productivity translates to savings of $170 million. By some estimates, automated trucks in the Pilbara Region of Western Australia yield savings of around $1.50 per tonne of iron ore, or roughly $490 million annually based on 2019 production volumes. This may further exacerbate discontent with inequality.

In this context it may become increasingly difficult and time consuming for companies to develop projects, with delays and cost overruns possible due to more intense demands from governments, local communities, and organised labour. Operating projects may become more vulnerable to protests and blockades by aggrieved local stakeholders and adverse regulatory action by frustrated governments. Companies mired in conflict with stakeholders at individual assets may face negative knock-on effects at the group level, including downward pressure on ESG ratings, civil society pressure and difficulty attracting investment.


A Way Forward

Companies must urgently shift their thinking and their strategies on local benefits to effectively respond to the interlinked crises of the pandemic-induced downturn and increased automation, and ensure the arrival of any new mine has a genuinely transformative local economic impact. Among levers companies can pull to ensure that rising inequality does not undermine the social license to operate are:


1. Consider dramatic increases in social investment spending

Jobs are a core part of local value propositions, with the value of payments to local employees and suppliers far outstripping social investment spending at most mines. Companies may wish to consider increased social investment to offset the coming declines in payments to local employees and suppliers – ideally before communities start to feel the economic impacts of this shift – and pairing this increase with processes to ensure spending is impactful and effective.

There is considerable scope to increase social investment and to tie it to financial metrics for improved accountability and transparency. For example, this could take the form of commitment to spend a percentage of group earnings before interest, taxes, depreciation, and amortization (EBITDA) on social investment across all assets or a proportion of opex at individual assets. The ten largest private sector mining companies spent on average $60 million across their assets on social investment in 2019, though amounts varied wildly by company. Only three – BHP, Anglo American and Vale – spent over US$100 million and one spent just US$5 million.

It is unclear how companies make decisions about how much to spend and there are no standards in place to ensure they allocate an amount that is perceived to be fair. The top six executives at a major extractives company collected over US$40 million in total annual compensation in 2019, almost double the approximately US$20 million that the company spent on community investment and donations across its assets.


2. Design and implement a Benefits Sharing Plan (BSP) at every project

As employment shrinks as a proportion of local value share, companies will need to put more time and resources into developing, implementing and communicating other kinds of socio-economic benefits. The time and resources to design and implement sustainable and transparent BSPs should be incorporated into project development timelines and budgets from the onset.

Companies should take several steps to maximise the socio-economic impact of a BSP. Firstly, they should be rooted in participatory process, such as visioning exercises. Companies are increasingly seeking to align social investment strategies with top down-initiatives like the Sustainable Development Goals (SDGs). But when these strategies do not incorporate meaningful local participation, they can often be ineffective, inefficient and exclusionary. Moreover, while natural resource companies increasingly seek to demonstrate their commitment to SDG 10 specifically, reducing inequality within and among countries, there is little evidence they have had success in addressing inequality.

Secondly, these plans should set out an overarching strategy for spending and, where possible, detail how other project benefits can be leveraged to support these aims, such as infrastructure. Even high levels of social spending will be ineffective in building support unless underpinned by a clear strategy with stakeholder buy-in and an eye to sustainability. One extractives company spent more than 5% of capex on social investment at an asset in Africa – more than double its regional peers – but stakeholders overwhelmingly believed the mine was not making adequate socio-economic contributions due to a lack of long-term strategy and limited consultation with local communities on the aims of spending.

Thirdly, BSPs should target some benefits towards marginalised groups. For example, indigenous peoples account for almost 20% of the extreme poor and are three times more likely to be living in extreme poverty than non-indigenous groups according to World Bank data. In North America, they are also almost 40% more likely to be employed in the mining sector than their non-indigenous counterparts and uniquely vulnerable to the socio-economic knock-on effects of automation.


3. Consider making significant cash transfers to local communities in proportion with shareholder returns

Without structural change to value distribution models, shareholders stand to capture much of the value generated by automation-related savings. Companies could consider developing new and innovative mechanisms to inject cash or investment into local communities for assuming social and environmental risks – just as they return cash to shareholders for assuming financial risks.

Companies have disclosed little about what they plan to do with potentially significant automation related-savings. In 2019, the value of cash that one large multinational resource company returned to shareholders was 37 times greater than its spending on community investment, development contributions and payments to local landowners combined.

Cash transfer programmes could be one solution. Research consistently shows that unconditional cash transfer programmes (UTCs) drive reductions in monetary poverty, increase school attendance, improve health and nutrition outcomes, decrease child labour, and increase beneficiaries’ savings and investments. Evidence does not suggest they create work disincentives and several studies have found they increase labour force participation rates among working-age adults.[4]

The sustainability of such an initiative is a common theme of pushback – particularly ensuring that it would not foster an unhealthy dependence on a mine given it is infeasible to maintain such a programme in perpetuity post-closure. However, cash transfer programmes do not have to be permanent to have long-lasting socio-economic benefits. A finite programme over a twenty-year mine life could have a transformative impact, particularly when coupled with the other socio-economic benefits of development and operation.

There are several models that may warrant further exploration and research, including profit-sharing schemes oriented towards distributing capital to individual households. Many are not new. For example, it could take the form of a fund that pays out cash dividends to local households based on an operations’ annual profits, like the Alaska Oil Fund (a government-run fund which pays a dividend out to all state residents based on oil revenues). Other options could include small monthly transfers to all households within a project’s area of influence or an equity ownership scheme that provides residents in project-affected communities with shares.


[1] What 800 executives envision for the postpandemic workforce,  McKinsey, 2020.

[2] The Changing Nature of Work: Innovation, Automation and Canada’s Mining Workforce, Mining Industry Human Resources Council, 2020.

[3] Resilient and resourceful: PwC’s 17th annual review of global trends in the mining industry, PwC Global, 2020.

[4] For further details see: Cash transfers: what does the evidence say? A rigorous review of impacts and the role of design and implementation features, Overseas Development Institute, 2016.