Engaging with local stakeholders is the secret to success for international businesses operating in emerging economies
Engaging with local stakeholders is the secret to success for international businesses operating in emerging economies
The natural resources industry is going through a turbulent period, something analysts attribute to rising commodity prices and greater coordination between asset-rich governments, indigenous peoples and NGO activists.
Violent demonstrations against mining companies, fears of growing resource nationalism, and higher taxation of the extractive industries exemplify a trend now ranging from Africa to Latin America and Asia.
Whether stirred up by grandstanding populist politicians or an awakened general public, the outcome is often the same. Assertiveness is growing among resource-rich countries demanding more compensation in the form of higher tax payments or greater equity share, or in some instances altogether cancelling contracts and seizing assets.
In this environment, proactive corporate responsibility engagement is more important than ever, according to Daniel Litvin of the sustainability consulting company Critical Resource.
“Corporate responsibility is linked,” Litvin says, “in the sense that if companies can persuade the government and population of a country it is really committed to that country’s development … it makes it less likely that government will turn against the company.”
Management should find new partnership models that work more closely with governments, Litvin says. “Traditionally, companies go in and tinker here and there to encourage transparency and good governance, but the government remains corrupt and resource revenues end up not translating into sustainable development.”
Litvin’s advice is to enter into government partnerships in areas of training, education and technical support, but he says a lot of this also has to do with how companies manage their own environmental impact, as well as early due diligence assessments conducted before the completion of design and the start of construction.
Vedanta Resources might have taken this advice when it first began planning a bauxite mine in the Niyamgiri Hills of the east Indian state of Orissa. Seven years later it finds itself battling much-publicised allegations that it failed to adequately engage the Dongria Kondh, an 8,000-strong indigenous community whose traditional lands fall within the mine property.
The Church of England’s decision in January to withdraw its investment from Vedanta dealt another blow to the company’s credibility, something Jo Woodman, one of Survival International’s field investigators, says might have been avoided.
“They did the absolute minimum,” Woodman says, referring to radio and print broadcasts, which focused on the refinery, not the mine, and were in a language unknown to the Dongria.
Consultations may mean strong opposition from local communities, and companies are learning this. It is sometimes to their own chagrin but ultimately to everyone’s benefit, says Fernanda Diez of the International Council on Mining and Metals (ICMM).
“Consultation – with whom and in which way – is a recurring lesson in most of the examples that have worked,” Diez says.
When Newmont Mining made its first foray into Africa in 2003, the company learned from past difficulties at its Yanacocha gold mine in Peru, spending three years forging agreements before starting excavation at its Ahafo mine in mid-western Ghana.
Two better than one
Chris Anderson, Newmont Ghana’s director of corporate and external affairs, attributes Ahafo’s success to senior management support, and the decision to hire two general managers with equal clout. One of these is in charge of mining operations on the inside and the other focused on outside aspects of social and community development.
Consultation included more than 600 meetings and events between 2004 and 2009, with an assortment of local and regional stakeholders, including community leaders and members, government agencies, religious and traditional authorities, farmers’ groups, business associations and the media.
That consultation entailed reaching out to about 190,000 people whose land either fell within the mine lease area or was affected by other factors such as traffic.
“Some communities which did not meet the criteria were upset,” Anderson says. “But it was a mutually determined and consensus-driven decision by the Ahafo Social Responsibility Forum and its 55 members, based on clear-cut, objective and transparent criteria.”
Newmont gave priority employment to Ghanaians, hiring a 97% Ghanaian workforce of which 47% are local. But because the mine only employs 3,300 people, Newmont knew it would have to reach out beyond the mine if it was to have any chance at improving the lives of the surrounding communities, most of whom were subsistence farmers with low education levels.
Anderson says it is possible for mines to source substantial amounts of goods and services from small business and communities close to mine sites. It took a good deal of skills training in conjunction with the International Finance Corporation and a number of consultants, but the payoff seems to have been well worth the cost and time: $10m in contracts with local companies spanning food supply, clothing manufacture, contract landscaping and truck driving.
“People have been able to build up successful small businesses and branch out to other areas in the country,” says Anderson. “Small-scale business development can drive poverty reduction.”
As for farmers in the area, Anderson says the philosophy was to get them to think about farming as a business and not just a lifestyle. The company’s notion was to build on what people already knew and did by working to improve output and access to markets and micro-finance.
However, Anderson says there is always a countervailing pressure, “this tension … balancing local return and what’s fair against foreign investors maximising their return”.
Anderson says Newmont has paid roughly $42m in royalties to the Ghanaian government and almost none of that has come back to the local level.
The government sees gold prices rising, Anderson says, but does not have much knowledge about the capital-intensive aspects of Newmont’s business or the global gold market.
It’s why Newmont sought transparency in all its dealings – insisting the licence agreement be signed in parliament, rather than by the prime minister. Newmont has also been working through the Extractive Industries Transparency Initiative process to increase revenue return to the local level.
The next step involves local government’s capacity to spend the money once it receives it. “You don’t just negotiate a licence and walk away,” says Anderson. “There has to be a tremendous amount of engagement in awareness-raising on each side.”
Energetic engagement
For small and mid-sized companies wading into politically charged environments, the lack of deep pockets need not be a hindrance to the type of long-term, proactive engagement needed to win over government and civil society groups.
“Some may choose to engage more, some may choose to engage earlier or with different stakeholders,” says Mark Eadie, head of environmental risk at JP Morgan. “Some may use industry bodies such as ICMM or [oil industry group] IPIECA, while others will develop more resources in-house.”
Eadie adds: “Frequently the most common failing is insufficient engagement once they’re doing the right thing. So often they don’t get credit.”
By contrast, Chris Anderson at Newmont has a far less charitable view of so-called “juniors” who are often perceived to be short-term players interested only in flipping projects to the majors. “They should be put out of business if they can’t live up to environmental standards or aren’t willing to engage the community properly,” Anderson says. “To go to a local tea house and have your eyes and ears open – that doesn’t cost a cent.”
Aidan Davy, a senior programme director at the International Council on Mining and Metals, acknowledges the bad rap “juniors” often get, because they don’t have the capacity or the willingness to get it right from the onset of exploration.
“The savvier ones, they don’t go into deals with their eyes closed, but have done a great deal of due diligence – and not just concerning what’s in the ground but understanding the set of social relationships that they will ultimately have to take on board and deal with.”
The challenge is for companies to limit their role to that of a facilitator, rather than a provider of all development needs. “You don’t do that by a survey. It’s engage, engage, engage, and then you can begin to develop a shared understanding of key priorities,” Davy says.
Partnerships, he says, referring to a new ICMM report – Mining: Partnerships for Development – provide a base from which to understand the needs of the community.
“When we talk to people about working in partnership, they say ‘that’s terribly nice, but in practice it’s so hard to do. It just doesn’t happen like that.’”
“We want to demonstrate that this is not as easy as falling off a log,” Davy says. But there is a great deal going on, he argues, where companies and stakeholders have come together in partnership models that are more successful than companies acting unilaterally, without reference to the community or public authorities.
Gavin Hayman, director of campaigns for UK-based Global Witness, says a growing number of privately held companies are going into emerging hot spots where there’s government volatility or atrocious human rights abuses.
“We sit them down and say this is what a disclosure programme looks like,” Hayman says. “Rarely do we say you can’t go there but we do say you need to have transparency and regard for human rights in your operations.”
“We expect more from the big ones but, it’s amazing, you can have small companies that are very good – while it’s the large ones that often put forth a strategy of non-engagement.”
Corporate collaboration
Another option for companies is to work collaboratively, pooling corporate responsibility resources where common interests converge. Such is the case in the Nimba mountains. Three extraction companies – BHP Billiton, Rio Tinto and Arcelor Mittal – are trying to come up with a joint management plan for the preservation of a large expanse of west African rainforest bordering Sierra Leone, Ivory Coast and Guinea.
The Nimba mountains are a major global conservation priority because of their high levels of diversity and species rarity, says Jo Treweek, an environmental consultant with Fauna & Flora International, a UK-based conservation charity.
“There is a lot of goodwill towards investing in capacity building, but it’s not that easy,” Treweek says.
“We can perform good biodiversity studies but when we get to the level of working with communities and the government to make sure everybody has the ability to engage in this process, it’s very challenging – particularly in the timeline we have. So we are trying to get all the NGOs and companies involved together.”
Each company has its own strong specialty area, and companies are learning from each other. As Treweek points out, by combining corporate-NGO awareness, they can coordinate better, avoid duplication and, importantly, get things done.
Developing countries take control
Violent demonstrations against mining companies in Ecuador, Bolivia and Brazil, fears of growing resource nationalism in Libya, and higher taxation of the extractive industries in Kazakhstan exemplify just a few hotspot examples of a trend now ranging from Africa to Latin America and Asia.
Although superficially similar, the trend towards greater resource nationalism reflects different concerns. The Kazakhstan government announced in December that it would be increasing taxation on extractive industries due to rising prices on the global commodity market. It passed a new tax code and declared that production sharing agreements will no longer be used.
In October 2009, Libya established a new regulating high-level committee to oversee its oil and gas sector, bringing the National Oil Corp (NOC) under tighter government control. Analysts say the move reflects a conservative-dominated government under Prime Minister al-Mahmoudi advocating that more traditional socialist and statist principles be applied in the hydrocarbons industry.
At the same time, resource-nationalistic sentiments have been on the rise in recent years, as high oil prices spurred parts of the regime to seek higher government takes and to fear that oil companies were making away with too much of the country’s resource wealth. This has led to an increasing tug-of-war between the reformists dominating the NOC and conservative factions of Libya’s socialist regime.
Fears of growing resource nationalism have also been fuelled by a new formal requirement that all foreign joint ventures operating in the country should have a Libyan national in charge. After Libya opened its doors to foreign investment following the lifting of international sanctions in 2004, a host of international oil companies entered the country in a flurry of deal making. The new requirements will certainly affect their ease of doing business.
The trend towards resource nationalism in South America is a result of increased coordination among indigenous groups, particularly in the Amazon region, partly triggered by increased exploration of the resource potential there. Violent protests in Peru in June 2009 and elsewhere in the region reflect a desire among indigenous groups to increase their control. Yet they have for the most part failed to establish strong nationally based parties as a vehicle for political representation, with the exception perhaps of Bolivia.
Ecuador’s turn towards greater government control, by contrast, is led by the leftist president, Rafael Correa, who in 2007 began forcing foreign oil companies to convert their production sharing agreements into service contracts with the state-owned mining company.
The stated goal is for Ecuador to reduce its fiscal dependency on revenues from oil exports, thus placating indigenous communities that remain opposed to large-scale mining projects, which they argue will damage the environment. The president’s Yasuni initiative seeks to keep an estimated 850m barrels of heavy crude oil under the ground in a highly-biodiverse region near the country’s eastern border with Peru.