Mining companies add tremendous value to the world economy, producing essential inputs for products that improve the lives of billions. The sector’s health is integral to the development of resource-rich nations where mining dominates the local economy.
India’s mining sector currently accounts for 2-2.5 percent of the country’s GDP. With increased mining investment, India can add $210-250 billion to its GDP. Furthermore, much of India’s mining potential lies in the interior tribal areas, where development is lowest. If India introduces the right set of policies, the country can advance inclusive growth by creating 2-2.5 million direct jobs and supporting the development of more prosperous and sustainable communities.
Unfortunately, in India and across the globe, mining operations most often do not benefit the communities in which they are based. The business model often focusses on maximising short-term profits, using local population for low-wage jobs, while simultaneously turning to outside companies for high-value services, and ignoring the environmental costs and social disruption that their operations engender.
Sometimes, the influx of money and large-scale industrial operations strain local economic and political institutions so much that local populations are left worse-off. At present, mining states, such as Chattisgarh, Odisha and Jharkhand, have high levels of poverty, indicating that mineral wealth has not translated into prosperity, so far.
India’s mining industry has faced a great deal of criticism regarding civil conflict, environmental degradation and corruption. These failings exact a heavy price on society and cut into company margins. Companies have tried to address these issues and secure a ‘license to operate’ through community investment programmes.
Unfortunately, the programmes tend to be ‘tokenistic’ in nature and do not try to affect meaningful social change at a large scale. Thus, they neither improve relationships with local communities nor address larger systems-wide issues such as continued poverty, environmental problems or transparency.
Mining needs to take a new approach–one that recognises the critical business importance of social issues and applies strategies that will create benefits for both companies and the communities in which they operate. This notion of creating business value by creating social value is known as Shared Value.
Indian mining companies can benefit tremendously from Shared Value strategies. Adopting these strategies will require four major shifts in their approach:
An important opportunity for companies to address social needs in their value chain occurs in the project planning phase. Indian mining companies can learn important lessons from some successes in other parts of the world.
Newmont Ghana, for example, improved its process for land negotiations with the population surrounding its Afaho gold mine in north-western Ghana by adding stakeholder engagement and community specialists to its land negotiation teams. Estimates suggest that the company saved four months and roughly $350,000 in costs for each subsequent round of negotiations as a result of increased efficiency. Newmont spends $1.6 million less on annual security costs in Ghana than its competitors due to its strong relationship with local communities.
The Indian company, Vedanta, appears to be moving in this direction. After facing protests in 2010 that its bauxite mine in Odisha (earlier Orissa) would negatively impact the culturally-significant Niyamgiri Hills, the company opened a grievance process at the site. The open door policy allows community members to file complaints and discuss issues such as land acquisition, community development, employment, and environmental concerns with the company. While this effort started as a reactive response to threats, Vedanta is now extending it as a proactive model across the company in 2013.
A second shared value opportunity lies in developing a reliable local workforce and supplier network. This strategy addresses two challenges that mining companies face: A shortage of skilled workers and suppliers and high expectations from communities for new jobs and economic benefits.
India’s workforce development is a growing concern. The Ministry of Mines estimates there will be a shortage of 1600 professionals in geosciences and 3000 in mining engineering for 2009-2017, a factor that will surely hinder mining GDP growth. The industry must also ensure ample training capacity; current estimates indicate that the number of seats in engineering programmes must increase by a factor of three to meet the 2025 demand.
Companies in India are tackling this problem by setting up customised training facilities in the communities where they work. One example is Essar’s Steel Academy set up in 2010 to train the local youth. The two-year training programme for Diploma Engineer Trainees (DETs) enhances technical capabilities, teaches communication skills, and fosters leadership development. The first batch of 174 DETs graduated in 2012 and will be absorbed into the business, ensuring that well-paid jobs are staffed locally and that Essar has the high-quality employees it needs.
Civil unrest can undermine profit in numerous ways, ranging from infrastructure damage to increased spending on security, to operational stoppages. Given society’s mistrust in Indian mining companies, great opportunities exist to create shared value by building governance capacity. With increased transparency, companies can improve competitiveness and demonstrate greater accountability.
In other parts of the world, companies have invested in local governance capacity to address the challenges that they face. Many, such as Rio Tinto, Anglo-American, and Gold Fields have collaborated with the Extractive Industries Transparency Initiative (EITI) to bolster in-country transparency and accountability. It is disappointing that no Indian companies are involved with EITI. Industry leaders should support the Initiative to fight corruption and increase the competitiveness of their companies and the prosperity of the communities where they operate.
As Parliament votes on the Companies’ Bill recommending that private companies spend 2 percent of their net profits on corporate social responsibility (and requiring CSR reporting for all companies), the mining industry should seek opportunities to invest in Shared Value programmes that simultaneously improve the communities where they work and enhance their competitiveness.
The time is ripe for mining companies to address social issues that will improve efficiency, take ownership of cultivating a strong local workforce and build governance and accountability within the sector as a whole. Only with these steps will the sector emerge as the sustainable driver of GDP the country needs in the next decade.
By Dane Smith, FSG Managing Director and Melissa Scott, FSG Consultant
(Dane has over 20 years’ experience advising private and public sector leaders in business strategy and is a co-leader of FSG’s shared value and global development impact areas. Melissa is a consultant in FSG’s Mumbai office.)