Sustainable development requires truth in advertising

by Tim McDonald, MBA ’15

This article was written in response to a seminar given by Tom Albanese, Chairman, Vedanta Resources Holdings, in an EDGE Seminar on Nov. 6, 2013 at Duke University’s Fuqua School of Business.

Sustainable development is critically important to the mining industry for very pragmatic reasons.  In particular, mining companies must strive to conduct operations in a sustainable manner to avoid government expropriation and indigenous instability.  To this end, I would argue that stakeholder acceptance is the most critical component of sustainable mining operations.  Specifically, the mining company must convince and continue to assure those with a vested interest in the host-nation government, local communities, and downstream consumer base that the firm is responsibly utilizing resources—whether they be environmental, labor, or capital.

In its efforts to build an effective relationship with the host-nation government, the mining company must strive to reach an initial profit-sharing agreement that thoroughly satisfies both parties but also serves to advance the firm’s reputation as a partner seeking mutual benefit.  As Tom Albanese, CEO of Vedanta Resources Holdings, explained to the EDGE Seminar, mining operations are long-term projects that experience high risk for expropriation.  Once the firm has sunk costs, a covetous regime may seek to continually renegotiate more favorable terms, impose stringent taxes, or outright nationalize the mine.[1]

Sustainable development then, in the case of a highly profitable iron ore mine for instance, may require the firm to share more rents than competitors may have or currently are in similar circumstances so it can demonstrate goodwill.  Such efforts may appear to erode margins, but an astute historical analysis is rife with examples of governments instituting various forms of nationalization that ultimately serve to usurp far more of firms’ profitability.

While only firms themselves are completely aware their best alternative to a negotiated agreement, they must be willing to maneuver in the zone of probable agreement in an effort to generate a mutually beneficial deal—and then assure officials through whatever means necessary that the deal is in fact a good one.  Importantly, a firm ought not establish goodwill for its own sake but rather as a means of establishing leverage to be employed when necessary.

In addition to governments, the local and regional populace serves as a critical stakeholder to successful mining operations.  As Mr. Albanese described, successful, long-term mining operations create several disparate economic zones.  The first of those is nearest to the mine and includes a comprehensive support area.  The physical infrastructure and service system created to sustain the mining labor improves quality of life in this support zone.  Yet, this very improvement can alert those within the next geographic zone, referred to as the “orbit of influence” by Mr. Albanese, to the inequalities created by the operation.  In addition, these inequalities are rightfully perceived opportunities for those who previously had none and consequently inspire “speculator migration” as defined by Mr. Albanese.  Invariably, too few opportunities exist for those who want them, and the resulting overpopulation and underemployment fuels instability.[2]  So, despite improved conditions for some, the inequities experienced by many can all too easily create instability that hinders operations.  Truly sustainable development in this case requires the firm to slowly and purposefully invest in necessary infrastructure for its labor force and also those susceptible to becoming “have-nots” within the orbit of influence.

If conducted properly, these investments mitigate several well-documented problems.  In addition to creating a more stable operating environment, slow and purposeful investments help curb rapid inflation and the onset of Dutch Disease.[3]  Conveniently, slow and smooth infrastructure and service growth provides the populace continual opportunities to perceive improvement in their condition.  Simply, they can physically see that something is always happening, as opposed to receiving a larger investment over a shorter term they may mistakenly perceive as a single, giant gift.  I cannot stress the importance of preventing the all-to-common mindset in foreign aid-rich environments that demands “what have you done for me lately?”

Finally, mining firms would be remiss if they failed to consider their buyers’ power as stakeholders to ongoing operations.  Customers and activist onlookers from domestic audiences must also perceive firms’ actions as fair and well-intentioned.  Otherwise, mining companies risk enraging buyers and/or activists who may then consolidate buyer power and seek to impose harsh regulations on the industry.  One poignant example should resonate strongly with those who do not heed this advice: a successful domestic NGO campaign based on human rights issues pressured Canadian Talisman Oil to divest Sudanese operations after suffering a dramatic depression in its stock price.[4]  Transparency in operations and local efforts along with effective education campaigns for domestic audiences can help sustain positive perceptions of mining operations.

Mining companies must strive to assure their stakeholders they are responsibly utilizing resources and profits.  Although Mr. Albanese effectively argued this case, I believe managing perceptions is actually far more important than the success itself.  Significantly, I am not suggesting firms should falsify or exaggerate their claims—simply endeavor to improve perceptions and manage expectations.  Sustainability research has demonstrated such efforts are not periphery; they have historically demonstrated enhanced return on investment.[5]

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