MINING A MIRAGE? Reassessing the shared-value paradigm in light of the technological advances in the mining sector Aaron Cosbey Howard Mann Nicolas Maennling Perrine Toledano Jeff Geipel Martin Dietrich Brauch MINING A MIRAGE? Reassessing the shared-value paradigm in light of the technological advances in the mining sector Aaron Cosbey Howard Mann Nicolas Maennling Perrine Toledano Jeff Geipel Martin Dietrich Brauch Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector © 2016 International Institute for Sustainable Development Published by the International Institute for Sustainable Development ISBN 978-1-894784-75-7 INTERNATIONAL INSTITUTE FOR SUSTAINABLE DEVELOPMENT The International Institute for Sustainable Development (IISD) is one of the world’s leading centres of research and innovation. The Institute provides practical solutions to the growing challenges and opportunities of integrating environmental and social priorities with economic development. We report on international negotiations and share knowledge gained through collaborative projects, resulting in more rigorous research, stronger global networks, and better engagement among researchers, citizens, businesses and policy-makers. IISD is registered as a charitable organization in Canada and has 501(c)(3) status in the United States. IISD receives core operating support from the Government of Canada, provided through the International Development Research Centre (IDRC) and from the Province of Manitoba. The Institute receives project funding from numerous governments inside and outside Canada, United Nations agencies, foundations, the private sector and individuals. Head Office 111 Lombard Avenue, Suite 325 Winnipeg, Manitoba Canada R3B 0T4 Tel: +1 (204) 958-7700 Website: www.iisd.org Twitter: @IISD_news ABOUT THE COLUMBIA CENTER ON SUSTAINABLE INVESTMENT The Columbia Center on Sustainable Investment, formerly known as the Vale Columbia Center on Sustainable International Investment, is a joint center of Columbia Law School and the Earth Institute at Columbia University and a leading applied research center and forum for the study, practice and discussion of sustainable international investment. Our mission is to develop and disseminate practical approaches and solutions to maximize the impact of international investment for sustainable development. CCSI’s premise is that responsible investment leads to benefits for both investors and the residents of host countries. Through research, advisory projects, multi-stakeholder dialogue and educational programs, CCSI focuses on constructing and implementing a holistic investment framework that promotes sustainable development and the mutual trust needed for long-term investments that can be practically adopted by governments, companies and civil society. Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector September 2016 Written by Aaron Cosbey, Howard Mann, Nicolas Maennling, Perrine Toledano, Jeff Geipel and Martin Dietrich Brauch IISD.org ii Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector Acknowledgements The authors would like to acknowledge a few of the many contributions that made this work possible. None of this analysis would have been possible without the generous efforts of the firms that supplied us data who, though they have requested anonymity, have our deep gratitude. We were ably assisted by the efforts of George Donald, Juan Medina and Alejandra Ucros, who worked with CCSI to complete the survey of new technologies as well as analyzing the procurement data provided by firms. We are also grateful to the International Development Research Centre, whose funding was instrumental to this effort, and whose critical interest in this area allowed us to break new ground. About the Authors Aaron Cosbey is a development economist and senior associate with IISD, where he focuses on trade, investment and sustainable development. Howard Mann, associate and senior law advisor at IISD, is a leading international lawyer specializing in international investment and sustainable development law. He has advised the governments of more than 80 nations. Perrine Toledano is the head of extractive industries at the Columbia Center on Sustainable Investment, leading the centre’s workstream on extractive industries and sustainable development. Nicolas Maennling is a senior economics and policy researcher at the Columbia Center on Sustainable Investment, with a focus on extractive industries and sustainable development. Jeff Geipel leads the Mining Shared Value initiative of Engineers Without Borders Canada, which works to increase local procurement by the global mining industry to improve the development impacts of mineral extraction. Martin Dietrich Brauch, an associate with IISD’s Economic Law and Policy program, advises developing countries on foreign investment law and policy to help ensure that mining activities contribute to sustainable development. IISD.org iii Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector Executive Summary Introduction The concept of shared value is becoming a linchpin of the modern mining sector. It goes beyond companies focusing on community investment and philanthropy approaches, and argues that firms can bring value to both themselves and their host communities, regions and countries by any of three different means: 1) Reconceiving products and markets, innovating to ensure that their products serve market needs and do as little harm as possible. 2) Redefining productivity in the value chain, looking for improvements in logistics and in the use of energy and other resources. 3) Building supportive industry clusters at the company’s locations, focusing on mutually beneficial improvements in infrastructure, supplier capacity and human resources. In this paper, we consider what changes in technology might mean for the third of these avenues, focusing specifically on the ways in which firms add value to economies through their procurement of goods and services, and through employment. These categories of expenditures in our two case studies amounted to 30 per cent and 80 per cent respectively of total expenditure, while payments of royalties and taxes to government—a category of value on which there is often greater focus—amounted to 3 per cent and 15 per cent respectively. Any disruptions to these major streams of expenditure may have important repercussions: the shared-value paradigm, by promising to deliver benefits to host communities, regions and countries, has become increasingly critical for mining companies in securing their social licence to operate.1 The delicate balance inherent in the shared-value paradigm is especially relevant for developing countries and other states where poverty eradication, social development and environmental protection are urgent development challenges. The research question we ask in this paper is: In the near and medium terms, what will happen to the local employment and procurement components of the shared-value paradigm—and, by extension, to the mining companies’ social licence to operate—if technological change radically alters the amount of money mining firms are spending on hiring, procurement and other practices regarded as creating shared value? Technological Advances Driving Automation Recent decades have seen ample productivity-increasing innovations at mine sites, such as larger, more durable and efficient shovels, haul trucks, crushers, grinding mills and flotation cells; and better chemistry to improve processing recoveries. In the long run, we will probably see technologies or practices that will radically change how mining is done, such as deep-sea mining, asteroid mining and microbe mining. Given the fundamental uncertainty and longterm nature of such technologies, we do not focus on them in this study, instead assessing new technologies that are being piloted today, which will be carried forward in the near-to-medium term. These technologies include: 1. Autonomous haul trucks and loaders: One person alone can already remotely operate a small fleet of these autonomous trucks. Improvements in software are likely to allow this to be performed even more efficiently by algorithm-driven computer programs. Driverless technology can lead to a 15 to 20 per cent increase in output, a 10 to 15 per cent decrease in fuel consumption and an 8 per cent decrease in maintenance costs. 1 Social licence to operate is defined herein as a minimum and broad-based level of legitimacy, trust, acceptance and support of local stakeholders (including the host community, local leaders and civil society organizations) that a mining company requires for the operation of a mine. IISD.org iv Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector 2. Autonomous long-distance haul trains: Technologies are being piloted that allow long-haul trains carrying bulk commodities to run fully automated from the mine site to the port. 3. Tele-remote ship-loaders: Fitted with video cameras, thermal imagers, lasers and sensors, tele-remote shiploaders are operated from a control room with a line-of-sight view. This type of automotive technology is unlikely to have an adverse net impact on employment, given that the operator is just moved from the cabin of the ship-loader to the control room, but the skill set changes. 4. Semi-autonomous crushers, rock breakers and shovel swings: These machines reduce the size of large rocks and scoop up the ore at the location of extraction. The mobile crusher performs two tasks simultaneously as it transfers the crushed rock directly for processing via conveyors, eliminating the need for haul trucks within a mine. 5. Automated drilling and tunnel-boring systems: These are used in open-pit mining and exploration activities. One operator can monitor up to five machines from a remote monitoring station. The remote operator needs only an interface with the machine to tell in what order the drill pattern should be drilled. The tunnel-boring machines significantly reduce the time, cost and risks involved to build and expand an underground mine. They are likely to halve the number of contractors involved in drilling and blasting, and those required during the construction phase. 6. Automated long-wall plough and shearers: This technology is being implemented in the coal mining sector. Before automation, workers manned the long-wall roof supports on hydraulic jacks, called shields. Similar to the automation of blast-hole drills, remote operation keeps workers out of harm’s way near the drills and potential falling debris. 7. Geographic information systems (GIS) and Global Positioning Systems: GIS is now commonly used in almost all aspects of mining, from initial exploration to geological analysis, production, sustainability and regulatory compliance. Over time, however, as the use of GIS becomes more evenly dispersed on a global scale, old procedures for mine surveying will become redundant. Automated positioning systems can manage and improve the safe operation of heavy equipment such as dozers, drills, excavators, loaders, scrapers, graders, soil compactors, off road trucks and light vehicles. 8. Autonomous equipment monitoring: Using many different technologies, from cameras and thermal imaging to self-aware machinery able to report its progress, equipment monitoring is extremely important, as preventive maintenance workers can make up a large proportion of the workforce on a mine site. 9. Programmable logic controllers (PLCs): Flexible PLCs are digital computers that typically automate industrial electromechanical processes and replace relays, timers, counters and sequencers. They are an enabling tool for improved process control. Once installed, they can be reprogrammed to improve the control of processes across the full spectrum of industry activity. This technology is the most crucial in the automation revolution and arguably the most important in taking away semi-skilled onsite jobs. 10. Control systems: Offsite control rooms are becoming bigger and more complex as mines become automated. Today, only mining companies with the most advanced technology have control systems that employ a substantial number of workers. It is difficult to predict the speed at which these technologies will be rolled out, but the automation literature suggests that we are entering an era in which the availability of automation technology is accelerating rapidly. The technologies described above, all of which are in use now, are likely to reach their peak rates of deployment in the next 10 to 15 years. The commodity price downturn seems to have accelerated the move towards automation as companies are looking to increase mining productivity while reducing spending on staff, capital and energy. IISD.org v Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector Types of Occupations Most Affected and New Ones Created New technology will change the nature of mining personnel tasks, whereby workers become passive supervisors of the process rather than active operators of equipment. Automation will reduce the number of operational jobs in areas such as drilling, blasting, and train and truck driving—areas that typically constitute over 70 per cent of employment in mines. New roles will be created in the development, observation, servicing and maintenance of remotely controlled autonomous equipment as well in data processing and systems and process analysis. Consequently, workers with specialized skills in remotely controlled and automated systems will be in demand as automation increases, while current employees will need retraining, re-education or both to keep their jobs. Results There are many ways in which we might assess the impacts of a mining operation on its host community and host country, standard among which are: • GDP, or gross value added: the amount of economic value the mining operation brings to the economy • Employment: the number of jobs created by the mining operation • Government revenues: the amount of revenue generated for the host governments by the mining operation. We will use these three metrics in the analysis. Using expenditure data furnished by two companies and four mines—one located in a lower-middle-income country and three in a high-income Organisation for Economic Co-operation and Development (OECD) country2—we will estimate the magnitude of impacts to be expected in a typical mining operation. This will necessarily be an imprecise exercise, and Appendix 1 lays out our assumptions and caveats. Ultimately our aim is to give the best possible indication of the magnitude of impacts to be expected, given the constraints. The Baseline Cases Both case study firms are mining entities, with some basic processing (concentration), and both have total annual expenditures exceeding USD 600 million. The distinction between local and international procurement is worth noting.3 For the high-income OECD country mines, local procurement amounted to 58 per cent of total operational expenditures. The lower-middle-income country operation, by contrast, procured only 12 per cent of its goods and services within the host country. The Impacts of Automation While there is not enough research into the impacts of automation on the size of the mining workforce, we have two broad estimates on which to base our scenarios. McNab et al. (2013) suggest that introducing fully autonomous equipment “would reduce the workforce of a typical open-cut, iron-ore mine by approximately 30 to 40 per cent.” In another report, Accenture (2010) evaluates the economics of three types of equipment (trucks, dozers and drills), 2 The companies involved have agreed to share procurement and other data with the researchers only on the condition that their names and commercially sensitive details be kept confidential. 3 In this paper we define local as sourced within the country of operations. IISD.org vi Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector suggesting that automation could reduce the number of operators in open pit mines by up to 75 per cent. We build three scenarios of workforce reduction through automation, bracketing the two estimates cited above with rates of 30, 50 and 70 per cent. Doing so involves going through the detailed procurement accounts for each firm and deciding which would be sensitive to changes in workforce size. Beyond the impacts of workforce reduction, we noted above that driverless technology using equipment under control (EUCs) will have impacts by saving on fuel consumption. Spence (2014) estimates that driverless technology can bring about a 10 to 15 per cent decrease in fuel consumption. We assume a 12.5 per cent decrease in diesel consumption in our scenarios. In addition, assuming that haul trucks in the mine are using EUCs and using the rate calculated by Fortescue in its iron mines in Australia, an extra 2.3 per cent in fuel savings could be achieved if they are installed in trucks (Australian Government, Department of Resources, Energy and Tourism, 2014). As such, we assume that mines could save 14.8 per cent in fuel used for hauling if they implement autonomous systems and EUCs. We also assume that 50 per cent of diesel in our sites is dedicated to hauling (a conservative estimate), and therefore subject to reduced demand under automation. GDP Impacts We combine the three scenarios (reductions in workforce of 30, 50 and 70 per cent) with savings of 14.8 per cent in fuel locally purchased. The highlights of the GDP impact results are: • Impacts relative to total procurement are small: local procurement drops by 2, 3 and 4 per cent in the highincome OECD case, and in the lower-middle-income country case, the corresponding figures are 6, 9 and 11 per cent. • Absolute impacts may be significant, particularly in the local communities: between USD 7.2 million and USD 15.8 million less spent in-country in the high-income OECD case, and between USD 4.6 million and USD 8.9 million less spent in the lower-middle-income country case. • Worker-related procurement, such as housing expenditure, is the most significant element of the predicted reductions. Fuel savings are relatively small. These results only cover a portion of the total impacts of mining automation, as they include neither the direct loss of wages and salaries for mine employees, nor the indirect and induced impacts of reduced spending.4 These elements are introduced in turn below. Including salaries and benefits paid to mining workers in the analysis gives us: • In the high-income OECD case, the mines’ contribution to GDP in the three scenarios drops by between 9 and 20. The corresponding reductions for the lower-middle-income case are higher: from 13 to 31 per cent. • While procurement drops in all three scenarios, the impacts of reduced payroll are much more significant. In the high-income OECD country case, reduction of wages and benefits are responsible for 86 per cent of impacts; and in the lower-middle-income country case, they are responsible for 92 per cent. 4 Indirect impacts result from the spending that suppliers must do to meet direct demand from the mining operation. Induced impacts are the result of consumer spending by employees of the mine. IISD.org vii Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector When we add both indirect and induced effects to the analysis, we get the following results: • An absolute reduction in contributions to the national economies of the host countries ranging from USD 92 million to USD 284 million. • As a percentage of GDP in the respective host economies, this translates into small impacts: at most just exceeding 0.01 per cent in the high-income OECD. In the lower-middle-income country, the percentage is higher, ranging from just below 2 per cent to just below 4 per cent of national GDP. • In terms of reductions to the overall value contributions made by the individual mining operations, the results are more significant: In the high-income OECD case, the percentage decrease ranges from 8.5 to 19.6 per cent, while the lower-middle-income country range is from 6.2 to 14.1 per cent. Note that procurement and employment are not the only way that mining operations contribute to the well-being of their host communities, regions and countries. As discussed above, the shared-value paradigm also conceives of other important classes of spending—on infrastructure like roads that are shared by the general public, for example, or on downstream processing and beneficiation operations. It is not envisioned that automation will significantly affect these categories of spending. Employment Impacts Another way of assessing the impacts of mining expenditure is by measuring the number of jobs created.5 Direct employment in the high-income OECD country was 1,457 jobs, of which all were domestic. We estimate this number increases to 4,801 when indirect and induced effects are considered. In the lower middle-income country, the corresponding figures are 2,550 jobs, of which 2,470 are domestic, and 5,100 jobs if indirect effects are considered.6 These baseline case figures for jobs created can be modified using the three scenarios for job loss to get a picture of the types of impacts automation might have in terms of employment. Only direct and indirect effects are considered; if induced effects were included the numbers would be higher. • Job loss in the high-income OECD country ranges from 1,016 to 2,372. • Job loss in the lower middle-income country ranges from 1,530 to 3,570. Government Revenue Impacts The final category of impact is government revenue. This includes taxes, royalties and dividends paid by the firm to all levels of government in the host state. We also include, separately, estimated value of personal income tax paid by employees as a result of mine employment. We have assumed that the former will not change significantly as a result of automation, though that assumption is surely wrong: we expect automation to increase profitability, and corporate income tax and dividends are linked to profits. It would be difficult, however, to make any meaningful estimates as to their magnitude and nature, as they will depend so critically on the specific context of each operation. In the baseline case, government revenues from payments made to government and personal income taxes of mine employees are twice as high in the lower-middle-income country case, driven by higher payments to government. Employee personal income tax rates are almost double in the high-income OECD case, and the average salary is twice as high, but that is not enough to mitigate the effect of the large difference in direct government payments; the latter are 4.5 times higher in the lower middle-income country case. 5 6 Employment is expressed in terms of full-time equivalent staff and does not count foreign head office employment or contractors. We were unable to derive an estimate of induced employment effects, not having an appropriate employment multiplier. IISD.org viii Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector The impacts of automation on the baseline cases, considering direct, indirect and induced effects: • In the high-income OECD country, higher wages and higher personal income tax rates make the lost tax revenue much more significant, with a range of reduction from 25 to 58 per cent • In the lower-middle-income country case, the corresponding reductions are much lower at 6 to 15 per cent. • In absolute terms, the reduction in government revenues, including direct, indirect and induced personal income tax revenues, ranged from USD 7.6 million to USD 17.8 million in the lowermiddle-income country case and from USD 31.7 million to USD 74.0 million in the high-income OECD country case. Conclusions Our analysis suggests that host countries will be increasingly at risk of reduced socioeconomic benefits from mining as existing new technologies are further rolled out. The impacts will be primarily in terms of lost local employment and personal income tax revenue, but will also come from reduced employment-related local procurement. The significance of these impacts will vary from case to case. At first blush, several factors seem to indicate that the effects will be more significant in developed countries, since baseline local procurement is higher there, as are personal income taxes, and since labour-saving technologies will be more quickly deployed where wages are highest. That said, there are reasons to believe that developing countries will feel the impacts more strongly, since more of them are over-dependent on the extractives sector, since adapting to change demands financial and technical capacity that many developing country governments lack, and in light of the expected shift from low-skills to high-skills jobs. As well, even though wage levels are lower in developing countries, there still may be incentives to introduce labour-saving technology; reducing employment there may serve other objectives, such as addressing skills shortages or circumventing strong unions. Finally, it is likely that the mine of the future will involve decreased local equipment-related procurement, as new, more complex operating systems are imported and serviced under contract from abroad. We noted that much of the social licence to operate may depend on the degree to which the shared-value proposition holds true. As such, the predicted drop in benefits derived from local procurement and employment should be a concern for firms and host countries and communities alike. It should also be a warning of the need for firms and governments to focus on other ways in which mining can contribute to the host economy and host communities. Outside of the realms of procurement and employment, there are four other avenues through which shared value can be created: 1. Downstream (forward) linkages relate to the beneficiation of extracted commodities through refining, smelting and further downstream processing of the commodity before reaching the final consumer. 2. Horizontal (lateral) linkages relate to the development of new non-mining-related industries adapting the capabilities developed to serve the mining-related value chain. 3. Knowledge (technological) linkages relate to the transfer of knowledge and technological know-how to state-owned companies, the employees of the mine and to the labour force involved in the mine’s value chain. 4. Spatial (infrastructure) linkages relate to the benefits associated with the infrastructure developed for an extractive-industry project (such as railways) profiting other actors in the economy. IISD.org ix Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector The potential for each of these linkages is very context specific, and none is simple to realize. However, the trends surveyed above enhance the importance of assessing these alternative types of linkages. There might also be efforts to revise the fiscal element of shared value. Most straightforward would be the passive receipt of the increased taxes, dividends and possibly royalties that should come from automation-driven improvements in productivity and profits. This may come in the form of higher tax levels on profits, or higher royalties on production. There may also be options for governments that pursue newer approaches to managing the fiscal regimes in relation to mining by, in particular, adopting fiscal regimes that are more progressive with respect to prices, costs and time, and that tax away the rent as a resource rent tax would do. Another set of options involves changes to the fundamental relationship between investor and host governments, with the latter considering new ownership structures ranging from, for example, increasing their equity share to maintaining full ownership of the resource and mining operation. These would imply more fundamental changes and alternatives to the prevalent concession agreement model, changes that have already been more common to the oil and gas sector. This could include forms of production-sharing agreements or fee-for-service contracts, for example. New combinations of changing ownership and contractual models may also arise. While none of the possibilities discussed here is straightforward, this set of options involves approaches with a record of successes and failures, and the lessons of history (both positive and negative) will be important for governments exploring these routes. It is worth noting that government ownership of the resource would likely expand options for enhancing value in other parts of the shared-value paradigm, especially if linked with other government policies on training and local economic development. This would be subject to realistic appraisals of how to optimize value without putting at risk the value of the mining operation itself. One clear lesson not explicit in the analysis above stems from the lack of readily available data on procurement. We found it exceedingly difficult to access data from companies on the kinds and volumes of goods and services they purchase at mine sites, for a host of reasons, despite good intentions on the part of a large number of firms. Similar projects and research the authors have engaged with have encountered similar challenges. Those problems go well beyond creating challenges for the present study. Not understanding what mining companies purchase locally has negative implications for corporate management, partnership building and government policy-making. A good starting point might be an effort by the industry to standardize the reporting in this area, if not for the sake of internal intelligence then in pursuit of ways to salvage the shared-value proposition. There is clearly a need for further research in this area, both in confirming our basic findings and in exploring the nuances of the relationship we have identified. Does it matter, for example, if we are looking at open-pit or underground operations? Would different minerals yield significantly different results? It would also be interesting to explore more fully the relationship between the host country income level and the impacts of technology, both confirming the distinctions we observed and considering middle-income or emerging country cases; our two cases are situated toward the ends of the country income spectrum. We expect that more research will sharpen our sense of what to expect as the advent of new technologies changes the way mining investment interacts with host countries, regions and communities. The better we understand the changing realities, the better both firms and host countries can ensure the continued relevance of the promise of shared value. IISD.org x Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector Table of Contents 1.0 INTRODUCTION.........................................................................................................................................................................1 2.0 THE SHARED-VALUE PARADIGM AND THE MINING SECTOR ...................................................................... 5 2.1 From Corporate Social Responsibility (CSR) to Creating Shared Value (CSV) ..................................6 2.2 Making the Shared-Value Paradigm Work in the Mining Sector ......................................................................7 3.0 TECHNOLOGICAL ADVANCES DRIVING AUTOMATION................................................................................ 11 3.1 Scope, Scale and Timing....................................................................................................................................................................12 3.2 Types of Occupations Most Affected and New Ones Created ....................................................................... 17 3.3 Expected Impacts in Developing and Developed Countries............................................................................. 18 4.0 RESULTS .....................................................................................................................................................................................21 4.1 The Baseline Cases ............................................................................................................................................................................... 22 4.2 The Impacts of Automation .......................................................................................................................................................... 24 4.2.1 GDP Impacts................................................................................................................................................................................. 25 4.2.2 Employment Impacts............................................................................................................................................................28 4.2.3 Government Revenue Impacts ....................................................................................................................................30 5.0 CONCLUSIONS ......................................................................................................................................................................33 5.1 Other Avenues for Shared Value: Re-Weighting the Elements ...................................................................... 35 5.2 Revising the Fiscal Element of Shared Value..................................................................................................................37 5.3 Challenges to the Current Shared-Value Approach ...............................................................................................38 6.0 BEYOND THIS STUDY .........................................................................................................................................................41 6.1 Data Limitations ......................................................................................................................................................................................42 6.2 The Need for More Research.........................................................................................................................................................42 REFERENCES ................................................................................................................................................................................... 46 APPENDIX A: ASSUMPTIONS AND CAVEATS ................................................................................................................51 IISD.org xi Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector IISD.org xii Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector 1.0 INTRODUCTION IISD.org 1 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector 1.0 INTRODUCTION The concept of shared value has become a linchpin of the modern mining sector. It has become a core concept to ensure that resource-rich countries gain the maximum benefit from the extraction of their resources, while ensuring that the private sector has a legitimate opportunity to extract the resources on a for-profit basis. At its heart, the notion of shared value pertains to the sustainable development of the host state and host community. It involves issues of local procurement of goods and services, local employment, downstream uses of natural resources, uses of other resources surrounding the mine and mining community, and government revenue. The delicate balance involved in the development of the shared-value paradigm, reviewed in more detail below (Section 2), is especially relevant for developing countries and other states where poverty eradication, social development and environmental protection are critical development challenges. The McKinsey Global Institute (2013) identified that in 2011 there were 81 resource-driven economies—where the mining and oil and gas sectors represent a significant part of GDP, exports and government revenue. The vast majority are developing countries, and almost 80 per cent have a per capita income below the global average. Roughly 69 per cent of the people living in extreme poverty in 2010—843 million people—were in resource-driven countries (McKinsey Global Institute, 2013). These figures illustrate the development challenges of resource-rich countries and explain the expectation that, through the application of the shared-value paradigm, the mining sector would bring substantial developmental benefits to large populations. Beyond widespread endorsement and use by the industry, the shared-value paradigm has become ubiquitous in the literature and public discourse about mining and sustainable development. It has become a mainstay of major mining policy frameworks, such as the Africa Mining Vision (African Union, 2009), the Mining Policy Framework (Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development [IGF], 2012) and the Organisation for Economic Co-operation and Development’s (OECD) Framework on Public-Private Collaboration for in-Country Shared Value Creation from Extractive Projects (OECD, 2016). Industry organizations such as the International Council for Mining and Metals (ICMM) also reference the shared-value concept in their good practice guidance (see, for example, ICMM, 2015). Furthermore, leading civil society organizations working in the area of mining and sustainable development have fully subscribed to it (see, for example, Columbia Center on Sustainable Investment [CCSI], 2015; Wilson & Kuszewski, 2011, published by the International Institute for Environment and Development [IIED]; International Institute for Sustainable Development [IISD], 2014; Natural Resource Governance Institute [NRGI], 2015). At the same time, the mining industry has been embarking on an unprecedented research and development program to vastly increase the use of high technology in the sector (as described in further detail in Section 3 below). This could lead mining companies to depend more on high-technology suppliers and skills that are only available in their home economies or in other more advanced economies; they would rely less on local labour, suppliers of goods and services, and other resources in the host community and state. Thus, technological improvements could drastically reduce the opportunities identified in the literature for mining companies to create shared value that supports the sustainable development of host communities and states, particularly through employment and procurement. IISD.org 2 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector In this paper, we examine whether the local employment and procurement components of the shared-value paradigm will be able to survive the ongoing and expected technological improvements in the mining sector and, if so, how it may need to adapt so that high-technology mining companies may still be able to create shared value. Our analysis questions whether the paradigm is a viable policy framework for the future, or whether it is a strategy that would have worked in old-style labour-intensive mines but cannot work in new-style mines based on high technology and automation. Is the mining industry embarking on technological processes that will make the local employment and procurement components of the shared-value paradigm obsolete, causing the sustainable development benefits of the activity to disappear—like a mirage? Specifically, the research question we ask is: In the near and medium terms, what will happen to the local employment and procurement components of the shared-value paradigm—and, by extension, to the mining companies’ social licence to operate—if technology change radically alters the amount of money mining firms are spending on hiring, procurement and other practices regarded as creating shared value? The issue is critical for all stakeholders: • It is essential to local communities and generally to citizens of resource-rich countries, who expect their natural resources to generate value that supports their development objectives. • Mining companies must consider whether and how they contribute meaningfully to addressing societal concerns—much beyond the goal of generating profits for their shareholders—as a requirement to earn and keep their social licence to operate.7 • Civil society organizations may need to reassess their level of commitment to the local employment and procurement components of the shared-value paradigm, asking whether they have become complicit in endorsing a paradigm that in the future will be unable to deliver as promised. • It is also important to governments at the local and national levels, as they formulate and implement policies: if technological change significantly affects the shared-value paradigm, does this imply the need to change policies such as performance requirements, whose success is based on exploiting the gains from an increasingly smaller source? In this paper, we explore these issues by first examining the shared-value paradigm and its application to the mining sector (Section 2). We then assess the impending technology changes in the mining sector (Section 3) and consider their implications on local employment and procurement, critical components of the shared-value paradigm. Our analysis, laid out in Section 4, suggests that these implications will be towards significant downward trends in numbers of employees, and less opportunity for local procurement of good and services. Given this result, we turn to some options that governments and industry ought to consider (Section 5), whether separately or in partnership, to address what we see as the likely impacts of seeking to implement technological improvements in a sharedvalue paradigm. Appendix A lays out the assumptions we made and caveats necessary in view of the difficulties we encountered in obtaining relevant data—a challenge facing researchers as well as policy-makers who aim to study the impacts of technological shifts and other significant changes at the macro-level. 7 Social licence to operate is defined below as a minimum and broad-based level of legitimacy, trust, acceptance and support of local stakeholders (including the host community, local leaders and civil society organizations) that a mining company requires for the operation of a mine. IISD.org 3 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector IISD.org 4 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector 2.0 THE SHAREDVALUE PARADIGM AND THE MINING SECTOR IISD.org 5 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector 2.0 THE SHARED-VALUE PARADIGM AND THE MINING SECTOR Shared value goes beyond companies focusing on community investment and philanthropy approaches, and argues that firms can bring value to both themselves and their host communities, regions and countries through enhanced local procurement of goods and services, local employment, downstream uses of natural resources, uses of other resources surrounding the mine and mining community, and government revenue. 2.1 From Corporate Social Responsibility (CSR) to Creating Shared Value (CSV) Companies have long attempted to use community investment and philanthropy to create benefits for the societies in which they operate. In many cases, these initiatives have arisen in response to external pressure to make companies responsible for correcting the failures resulting from economic activities conducted to the detriment of the society’s broader economic, social and environmental concerns. Porter and Kramer (2006, 2011) propose going beyond philanthropic approaches unrelated to the firm’s core business rationale and activity. The authors (2006, p. 84) first suggest a so-called “strategic corporate social responsibility” (CSR) framework, introducing the concept of shared value—“a meaningful benefit for society that is also valuable to the business.” Later they develop the concept further, proposing creating shared value (CSV) as a paradigm intended to supersede what they see as the narrow business logic of profit maximization and CSR, as they define it8: The concept of shared value can be defined as policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates. Shared value creation focuses on identifying and expanding the connections between societal and economic progress. (Porter & Kramer, 2011, p. 6) The shared-value paradigm recognizes that the factors of successful long-term business performance include not only financial aspects, but also consumer and societal needs, community concerns, environmental sustainability and well-functioning supply chains, among other elements. It considers that markets are defined by societal needs just as well as by conventional economic needs. According to the authors, if businesses take decisions based on the sharedvalue paradigm, they can generate innovation and growth for the benefit of companies and society in an integrated manner (Porter & Kramer, 2011). 8 In their work Porter and Kramer (2011) define CSR as consisting of philanthropic approaches including donations and community investment. However, several commentators (see, for example, Crane, Palazzo, Spence & Matten, 2014) argue that their portrayal of CSR in this way is an intentional “straw man” definition that narrows it to these philanthropic approaches and point out that most other definitions include general corporate behaviour and ethics. IISD.org 6 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector More specifically, Porter and Kramer (2011, p. 7) indicate that shared value can be created through business activity under three categories of opportunities: “by reconceiving products and markets, redefining productivity in the value chain, and building supportive industry clusters at the company’s locations.” To create shared value by reconceiving products and markets, companies should constantly look at the needs, benefits and harms embodied in their products, and explore opportunities for market innovation, repositioning and expansion. For example, reaching underserved markets (consumers in poor and disadvantages communities, in both developing and developed countries) could generate large societal benefits and substantial company profits (Porter and Kramer, 2011). Redefining productivity in the value chain, the second category of shared-value creation, can be done through improvements in logistics and in the use of energy and other resources (water, raw materials, packaging). Adopting better technologies, reducing or rationalizing the use of resources and promoting recycling practices can create shared value across the value chain. Companies can also help develop marginalized suppliers—through providing access to inputs, technology and financing—thus encouraging them to improve their quality and guaranteeing growing volume of supply. Porter and Kramer (2011) offer examples of shared-value creation through rethinking procurement strategies, distribution practices, employee productivity incentives and locational choices. The third way to create shared value, according to Porter and Kramer (2011), is to enable the development of local clusters, in view of the recognition that a company’s performance depends on the surrounding infrastructure and supporting companies. To help develop clusters, the companies should try to identify local gaps in areas including infrastructure, suppliers and educational institutions; consider which areas represent the greatest constraint to the company; and assess where the company may create shared value by direct influence or in collaboration with other actors. Criticized by few (Beschorner, 2014; Crane, Palazzo, Spence & Matten, 2014; Hartman & Werhane, 2013), the shared-value proposition gained broad endorsement in the literature as an important development in business management (see, for example, Ajith, 2014; Atiq & Karatas-Ozkan, 2013; Palmer, 2012; Pfitzer, Bockstette & Stamp, 2013; Pharoah & Walker, 2015; Solís & Moroka, 2011). In this paper, when we refer to shared value, we mean opportunities to align society’s interests with core business objectives and expertise. We do not, however, presume that such opportunities exist in all cases, or that shared value can in all cases obviate the need for the philanthropic version of CSR (Geipel, 2015). 2.2 Making the Shared-Value Paradigm Work in the Mining Sector The categories indicated by Porter and Kramer (2011) for creating shared value translate into tangible opportunities for mining companies. They can create shared value in their activities by conducting local procurement of goods and services and supporting the development of local suppliers; creating local employment; developing local skills through education and training; building or improving local infrastructure and logistics networks; supporting local enterprises for downstream uses of natural resources; and ensuring stable sources of tax and royalty revenues for governments (Dodd, Jakobsen, Dietsche & Macdonald, 2015; Hidalgo, Peterson, Smith, & Foley, 2014). The literature and the mining industry itself increasingly recognize that mining companies must obtain and maintain the so-called social licence to operate (Mann, 2015). The concept, difficult to define and still evolving, can be understood as the minimum and broad-based level of legitimacy, trust, acceptance and support of local stakeholders (including the host community, local leaders and civil society organizations) that a mining company requires for the operation of a mine (Mann, 2015; Dodd et al., 2015). IISD.org 7 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector By enabling mining companies to use their activities and resources to contribute meaningfully to the sustainable development of host communities, the shared-value paradigm became key for mining companies to secure their social licence to operate. Many mining companies have endorsed the paradigm, embracing it as a chance to regain the trust they had lost as communities increasingly blamed their activities for economic, social and environmental problems. The literature provides a wealth of examples of how mining firms can engage and have engaged in creating shared value through their activities (see, for example, Bastida, 2014; Hidalgo et al, 2014; Hope & Kwarteng, 2014; Svensson & Barnard, 2015). Figure 1 illustrates the importance of a broad understanding of how the mining sector can contribute to the wellbeing of local communities and host states. If we take these expenditures as, in rough measure, typical of a large mine, we see the importance of moving beyond the traditional focus on direct government revenues—taxes and royalties—to capturing a significant part of the supplies and services expenditures of a mine operation. Figure 1. Anglo American Expenditures 2014 Source: Anglo American plc (2014) In this case, we see that total expenditures on taxes and royalties are at about 11 per cent of total expenditures by the company. A second traditional focus of governments for revenues has been dividends. Here, we see about 7 per cent of total expenditures, but these are dividends for all shareholders, not just for government. If we assume for the sake of illustration that governments have a 15 per cent equity stake, then about 1 per cent of the total expenditure goes back to government from dividend spending. And unless government representatives control 50 per cent of the board of directors, the allocation of any dividends generally remains an issue fully within the control of the investor itself. In the case of both taxes and dividends, the percentages pale in comparison to the labour and purchasing components, at 15 and 43 per cent of company expenditures, 58 per cent when combined. For shared value to have a really significant meaning (in the context of employment and procurement), significant proportions of these two parts of the pie must accrue to the host state. IISD.org 8 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector In addition to their direct benefits to the local community and national manufacturing sector, the multiplier effects of these components are the most important of the economic spin-offs from mining. Procurement of goods and services from local suppliers strengthens local manufacturers and service providers, enabling them to maintain and progressively increase re-investment, employment opportunities and wages. In the best of cases, those suppliers become globally competitive exporters of their products. As consumers, the employees of these local suppliers also spend their wages in the local economy, thus helping stimulate the maintenance and development of other economic sectors. Taxes on local goods and services and on the income of local employees help ensure and progressively increase government revenues, which can in turn revert in favour of the local communities in the form of social policies, infrastructure and public services, among others. IISD.org 9 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector IISD.org 10 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector 3.0 TECHNOLOGICAL ADVANCES DRIVING AUTOMATION IISD.org 11 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector 3.0 TECHNOLOGICAL ADVANCES DRIVING AUTOMATION 3.1 Scope, Scale and Timing Mining productivity has increased over the years (Figure 2). While recent decades have seen a lot of innovation to increase productivity at mine sites (such as larger, more durable and efficient shovels, haul trucks, crushers, grinding mills and flotation cells, and better chemistry to improve processing recoveries), automation is expected to rapidly increase productivity between 7,000 and 8,000 tons/person-year. Figure 2. Past productivity and anticipated productivity from technology change Source: Peterson, LaTourrette & Bartis (2001, p. 49). Image reproduced with permission from Rand Corporation. The mine of the future may implement technologies or practices that will fundamentally change how mining is done, such as deep-sea mining, asteroid mining and microbe mining. Given the fundamental uncertainty and longterm nature of such technologies, we do not focus on them, instead assessing the technologies that are being piloted today, which will be carried forward and drive automation in the near-to-medium term (IBM, 2009). These technologies can be sub-divided into three categories: a) Tele-operations refer to mining vehicles controlled by an operator at a remote location with the use of cameras, sensors and possibly additional positioning software. Joysticks or other handheld controls are still used to control the vehicle’s functions, and operators have greater access to vehicle telemetry and positioning data through the tele-operation software. IISD.org 12 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector b) Semi-automation refers to partly automated control of mining machines. Only some of the functions are automated, and operator intervention is needed. Remote control technology is generally used to enable mining equipment to operate in dangerous conditions such as unstable terrain, blast areas, high-risk areas of falling debris and underground mining. c) Full automation refers to the autonomous control of one or more mining vehicles. Robotic components manage all critical vehicle functions, including ignition, steering, transmission, acceleration and braking, and implement control (that is, blade control, dump bed control, excavator bucket and boom, etc.) without the need for operator intervention. This sub-categorization is of interest, because tele-operations are unlikely to lead to a fall in workforce, but rather require a different skillset by the operators. Semi-automation and full automation, on the other hand, will not only require a different skillset by the operators, but also reduce the number of workers required to operate the mine. All these categories will require sourcing technologically more advanced goods and services. It should be noted though that in many instances technological advances go through all these three categories starting off with tele-operations, moving to semi-automation and ultimately to full automation. Below we present the key technologies being piloted that are currently driving the automation process. Apart from highlighting the current state of these technologies and likely development going forward, we also discuss the probable impact on employment resulting from these technological advances. 1. Autonomous haul trucks and loaders: The most publicized of all the mining automation technologies are driverless haul trucks. One person alone can already operate remotely at one time a small fleet of these autonomous trucks. Improvements in software are likely to allow this to be performed even more efficiently by algorithm-driven computer programs. By allowing a fleet of haul trucks to run autonomously, the safety, maintenance requirements, efficiency and environmental concerns of a mine site can be improved. According to researchers from the University of British Columbia, driverless technology can lead to a 15– 20 per cent increase in output, a 10–15 per cent decrease in fuel consumption and an 8 per cent decrease in maintenance costs (Spence, 2014). Rio Tinto announced that the “effective utilization” of autonomous trucks in the Hope Downs 4 iron ore mine was 14 per cent more productive “than in the best humanstaffed mine in the Pilbara” (Ker, 2015), and 13 per cent less expensive in terms of load and hauling costs (Rio Tinto, 2014). Rio Tinto’s Pilbara mine is the poster child for driverless haul trucks. To develop its autonomous trucks, Rio Tinto collaborates with Komatsu Ltd, a Japanese corporation that manufactures construction and mining equipment. The other company whose mines have incorporated driverless haul trucks is BHP Billiton, which has been working with Caterpillar since 2007 to produce autonomous driver technology (Ker, 2015). Beyond Australia, Sandvik, a supplier of equipment for mines has developed Sandvik Automine, which is an automated loading and hauling system for underground hard-rock mining. It has been used at a Codelco mine in Chile (since June 2004), a mine in Finland (since January 2005), a mine in South Africa (since August 2005) and a mine in Canada (since June 2007). Atlas CopCo, another supplier of mining equipment, has also tested remote haulage zones with two fully automated trucks at Nordana’s Brunwick ore mine in Quebec, Canada (Horberry & Lynas, 2012). Haul truck automation currently appears to have the greatest direct impact on mine employment. The technology has seen greater implementation than the other ones mentioned below, and truck drivers comprise a large portion of the workforce on the average mine site. Automating the haulage process by letting computer algorithms control the trucks nullifies the need for the haul truck drivers. Only a few job openings can be expected as a result of full truck haulage automation (more jobs in the semi-automation IISD.org 13 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector stage when operators control a small fleet of trucks). These operator jobs will require a different skillset from those of the truck drivers. 2. Autonomous long-distance haul trains: Technologies are being piloted that allow long-haul trains carrying bulk commodities to run fully automated from the mine site to the port. Rio Tinto has designed a fully automated train network for its iron ore mines in Western Australia’s Pilbara region. At the time, the project was estimated to cost USD 518 million. The company stated that automated trains would help address a significant skills shortage facing the industry while improving productivity at its iron ore operations (Ker, 2015). Rio Tinto planned to have 41 trains hauling its iron ore. With three high-paid drivers per train being nullified by automation, along with additional operators and staff who keep these trains running, the company announced that up to 500 employees could lose their jobs (Taylor, 2012). 3. Tele-remote ship-loaders: Fitted with video cameras, thermal imagers, lasers and sensors, tele-remote ship-loaders are operated from a control room with a line-of-sight view. Rio Tinto is implementing the technology at Dampier port (Mills, 2010). This is an example of the type of automotive technology that is unlikely to have an adverse impact on employment, given that the operator is just moved from the cabin of the ship-loader to the control room. 4. Semi-autonomous crushers, rock breakers and shovel swings: These are machines designed to reduce the size of large rocks and scoop up the ore at the location of extraction. The mobile crusher performs two tasks simultaneously as it transfers the crushed rock directly for processing via conveyors, eliminating the need for haul trucks within a mine. The mobile crusher was, for instance, implemented at Peppertree Quarry in New South Wales, Australia (Process Online, 2013). Semi- and fully autonomous shovel swing loading systems have been tested and implemented in Australia. 5. Automated drilling and tunnel-boring systems: Automatic drilling machines are used in open-pit mining and exploration activities. One operator can monitor up to five machines from a remote monitoring station. The remote operator needs only an interface with the machine to tell in what order the drill pattern should be drilled (Fiscor, 2009). Atlas CopCo has tested fully automated surface drilling technology at the Rocktec Application Centre in Perth, Western Australia (Horberry & Lynas, 2012). The tunnel-boring machines can significantly reduce the time and associated cost to build and expand an underground mine while doing it safely. Atlas Copco’s modular boring machines have achieved more than 10 metres a day, which is almost twice the rate achieved by conventional methods (Mining-technology.com, 2014). The technology is likely to reduce by half the number of contractors involved in drilling and blasting and required during the construction phase. 6. Automated long-wall plough and shearers: This technology is being implemented in the coal mining sector. Before automation, workers manned the long-wall roof supports on hydraulic jacks, called shields. Similar to the automation of blast-hole drills, remote operation keeps workers out of harm’s way near the drills and potential falling debris. While increasing workers’ health and safety, this process has reduced the number of workers in underground coal mines since the 1990s. The more recent technologies require less manual support, and these technologies have improved productivity by up to 10 per cent (CSIRO, 2015). 7. Geographic information systems (GIS) and Global Positioning Systems (GPS): Geospatial professionals with engineering and design firms have long had a traditional role in pre-mining stages of surveying, exploration, land rights management, environmental impact assessment and construction. GIS is now commonly used in almost all aspects of mining, from initial exploration to geological analysis, production, sustainability and regulatory compliance. Over time, however, as the use of GIS becomes more evenly dispersed on a global scale, old procedures for mine surveying will become redundant. Automated positioning systems IISD.org 14 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector have produced GPS technology and location-based services “to manage and improve the safe operation of a wide range of earthmoving and heavy mobile equipment from single machines to entire fleets including dozers, drills, excavators, loaders, scrapers, graders, soil compactors, off road trucks and light vehicles” (Horberry & Lynas, 2012, Appendix 1, p. 5). These systems have been implemented in Australia at the North Curragh and Cloudbreak mines (International Mining, 2012; Wirtgen, 2011). GPS and equipment sensors combined with wireless communication technology can be used as a “passive” collision avoidance system (Horberry & Lynas, 2012). 8. Autonomous equipment monitoring: The technology is integrated in most new mining equipment. Using many different technologies, from cameras and thermal imaging to self-aware machinery able to report its progress, equipment monitoring has an important role in optimizing mining (Fischer & Schnittger, 2012). This is a very broad category of automation, but is extremely important, as preventive maintenance workers can make up a large proportion of the workforce on a mine site. With this technology, predictive maintenance replaces preventive maintenance (Maras, 2013). 9. Programmable logic controllers (PLCs): Flexible PLCs are digital computers that typically automate industrial electromechanical processes and replace relays, timers, counters and sequencers. PLCs are an enabling tool for improved process control. Once installed, they can be reprogrammed to improve the control of processes across the full spectrum of industry activity. Therefore, their flexibility enables an organic growth of automation capability (Horberry & Lynas, 2012). Above all other technological advancements, this is the most crucial in the automation revolution and arguably the most prevalent in taking away semi-skilled onsite jobs. 10. Control systems: Offsite control rooms are becoming bigger and more complex as mines become automated. Today, only mining companies with the most advanced technology, such as Rio Tinto, have a control system that employs a substantial number of workers (Lynas & Horberry, 2011). Based on the literature reviewed, Figure 3 plots each of the above technologies—identified by its respective number—along a horizontal timescale and a vertical scale of employment impact. IISD.org 15 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector High Impact Zone (Short Term) 1 10 High Impact Zone (Long Term) 4 Impact on employment 5 8 6 9 2 Low Impact Zone (Short Term) Low Impact Zone (Long Term) 7 3 Time for the technology to be implemented at a mass scale Figure 3: Estimated relative impact of technological changes and impact on employment Source: The authors The automation of haul trucks (1) will have a high impact on employment in a relatively short term, given that existing mines have been testing these technologies successfully and have benefitted from a large fall in operating costs. GIS and GPS technologies (7) are already being rolled out in most mine sites, but these improvements are unlikely to have a large impact on employment. The rolling out of automated ship-loaders (3) is likely to take longer, given that the technology is still in its infancy, and tele-operations that are implemented are unlikely to have a drastic impact on employment. Considering that the increasing adoption of highly advanced control systems (10) will depend on the rolling out of all other automation technologies, it is likely that these will take time to be common among mine sites. Moving in-pit staff into control centres will have a significant impact on employment. The speed at which these technologies are going to be rolled out is difficult to predict, but the automation literature suggests that we are entering an era in which the availability of automation technology is accelerating rapidly. Currently in Australia, automation is engaged on a small scale relative to the existing number of mines, processing plants and export facilities. There are close to 500 sites associated with the resource industry. While some may be engaging in automation, only a handful of pioneering trials can claim automation as an operational concern. The commodity price downturn seems to have accelerated the move towards automation as companies are looking to increase mining productivity while reducing spending on staff, capital and energy (Deloitte, 2015). As indicated in the research performed by the Mining Industry Skills Center Inc. (2010), the strongest growth in automation is anticipated to take place over the next decade. The movement of all sites toward automation is foreseeable, and the rate of uptake is likely to be greatest over the next 15 years. The bell curve in Figure 4 demonstrates the expected progression in the amount of uptake of automation over the next 20 years in the Australian mining industry. IISD.org 16 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector 2010 2015 2020 2025 2030 2035 Figure 4. Expected automation in the mining industry, Australia, 2010–2035 Source: Mining Industry Skills Center Inc. (2010) 3.2 Types of Occupations Most Affected and New Ones Created New technology is almost certain to change the nature of mining personnel tasks whereby the human often becomes more of a passive supervisor of the process rather than an active operator of equipment. Automation will reduce the number of operational jobs in areas such as drilling, blasting, and train and truck driving—areas that constitute a high proportion of the mining workers, as can be seen in Figure 5. New roles will be created in the development, observation, servicing and maintenance of remotely controlled autonomous equipment as well in data processing and systems and process analysis. Other traditional roles will however remain, relating to site rehabilitation, road building and other site works in particular (McNab et al., 2013). Consequently, workers with specialized skills in remotely controlled and automated systems will be in demand as automation increases, while current employees will need retraining, re-education or both to keep their jobs (Somarin, 2014). Those specialized skills rely on knowledge of mathematics and science and an ability to use information technologies (McNab et al., 2013). All in all, some studies anticipate that, as a result of this revolution, “autonomous technologies seem likely to reduce additional jobs created through mining industry growth, rather than leading to a net reduction in mining employment” (McNab et al., 2013) IISD.org 17 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector Drillers, Miners and Shot Firers Metal Fitters and Machinists Truck Drivers Other Building and Engineering Technicians Electricians Mining Engineers Geologists and Geophysicists Production Managers Earthmoving Plant Operators Structural Steel and Welding Trades Workers Industrial, Mechanical and Production Engineers Contract, Program and Project Administrators Other Construction and Mining Labourers Other Stationary Plant Operators Accountants Purchasing and Supply Logistics Clerks General Clerks Chief Executives and Managing Directors Storepersons Cartographers and Surveyors 54.9 26.6 14.5 14.0 8.2 7.8 7.8 7.0 6.8 6.5 4.6 4.3 4.0 3.8 3.1 3.0 2.8 2.6 2.5 2.4 0 10 20 30 40 50 60 Figure 5. Main employing occupations in the mining industry (x 1,000) Source: Australian Government, Department of Employment (2014) 3.3 Expected Impacts in Developing and Developed Countries The impact of automation might be felt differently between developing and developed countries if we consider a series of factors working in opposite directions. The first factor is the cost of labour. We can assume that mining companies are more motivated to save on employment in areas where the labour is more costly and salaries are higher. For this reason, Australia and Canada’s workforces could be more threatened by automation than those in developing countries. The second factor is the search for higher safety, which is a unanimously accepted benefit of automation. “Reducing the numbers of people involved on the field mechanically reduces the probability of having accidents, especially considering that the mining industry will extract commodities from deeper and more complex ores in the future” (Mining Global, 2014). This factor would have disparate impacts if there were significant country-level differences between worker safety laws and regulations. A third factor is driven by the shortage of skilled labour in some countries. Some in the industry have described automation as a partial solution to the perennial problem of skills shortages: “By providing a safer working environment, the mining industry might be able to tackle the current labor shortage and attract high potential profiles” (Mining Global 2014). This might point toward developing countries being at a higher risk of witnessing automation roll-out than developed countries, given that the skills shortages there tend to be more acute. The fourth factor is the country’s capacity to deploy policy instruments to mitigate unemployment resulting from automation. These policy instruments range from training programs and tax credits to incentives that support selfemployment. Figure 6 features a range of policy instruments on which the institutional investors of CitiBank were surveyed; investment in education, support to self-employment, active labour policies and funding for research IISD.org 18 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector appear as the policies having the most successful impacts in mitigating the negative impact of automation on labour, irrespective of the sector. These policy instruments are expensive to implement and their infrequency in developing countries affected by automation might reinforce the differentiated impact between developing and developed countries (Frey & Osborne, 2016). Figure 6. Policies likely to be most effective in offsetting the risks of automation impacting labour and wealth distribution Source: Image reproduced with the permission of Citi GPS (2016). The fifth factor relates to workforce acceptance, materialized in particular by the unions’ resistance. This is, of course, not new: in the 20th century, labour unions resisted production technology in mining, shipbuilding, carmaking and cotton weaving. The responsibility for the declining technological dynamism of post-Victorian Britain is often attributed to the growth of the labour movement’s power. In the 1930s, Indian trade unions resisted a technical and administrative rationalization of cotton mill practices, which made India lose its market share. In the European and American auto industry, unions have opposed the closing of out-dated plants and the introduction of efficient practices of Japanese car manufacturers. Not all unions are conservative, and those in Germany and Sweden have historically shown more support to technology progress than elsewhere (Mokyr, 1997). Developing countries also boast strong unions, as the 2012 riots at South African mining sites highlighted, so it is unclear whether higher social and political resistance will occur in developing or developed countries. While it may be harder to implement job cuts in places where trade unions are stronger, there is a larger incentive for mining companies that develop new projects to implement new technologies that minimize labour at their mine site in order to have more control over operations. There are, of course, many ways in which automation and other new technologies will affect developing and developed countries alike. This is the case, for example, when automation is deployed not only to replace current tasks but also to enable “operations to reach mineral deposits that cannot be economically extracted under existing methods and mine layouts” (Anglo American, 2013). IISD.org 19 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector IISD.org 20 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector 4.0 RESULTS IISD.org 21 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector 4.0 RESULTS The research question pursued in this project is: What are the impacts of mining operations on local and national host economies if current trends in automation continue? In the previous section, we surveyed the changes in technology that we can reasonably foresee for the mining industry. Of those, we noted several with potential to alter the level of local spending in the operational phase of mines. There are many ways in which we might assess the impacts of a mining operation on its host community and host country, standard among which are: • GDP, or gross value added: the amount of economic value the mining operation brings to the economy • Employment: the number of jobs created by the mining operation • Government revenues: the amount of revenue generated for the host governments by the mining operation In what follows, we will use these standard metrics to estimate the impacts of automation. Using expenditure data from two companies and four mines—one located in a lower-middle-income country and three in a high-income OECD country9—we will indicate the magnitude of impacts to be expected in a typical mining operation. This will necessarily be an imprecise exercise. First, our sample size is small (we discuss in Section 6.1 the difficulties in obtaining data). Second, the nature of the technological advances driving changed impacts is unknown, and we will need to make reasonable assumptions based on the technology survey presented in Section 3. Third, even if future technological developments were fully known, the impacts of those developments on any individual mining operation would be a function of many context-specific factors, among them: the income level of host country, the type and scale of operation and the mineral or metal mined. We discuss these caveats more fully below, and give a detailed description of methodology and assumptions in Appendix 1. Ultimately, our aim is to give the best possible indication of the magnitude of impacts to be expected, given all the significant constraints on precise calculation. 4.1 The Baseline Cases We start with data from two country cases, one in a lower-middle-income economy and one in a high-income OECD economy. Both are mining entities, with some basic processing (concentration). The operational expenditures from the two cases are shown in Figures 7 and 8. 9 The companies involved have agreed to share procurement and other data with the researchers only on the condition that their names and commercially sensitive details be kept confidential. IISD.org 22 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector Int’l procurement 6% Local Procurement Contractor services Government 3% Energy Equipment Financial 11% Logistics, Transport Local procurement 58% Construction Worker-related goods Consumables/Reagents Wages and benefits 22% Fuel Unknown Total operational spending: $625 million Minor supplies Figure 7. High-income OECD country case Source: Procurement figures from company-furnished data. All other figures from 2014 corporate reports. Int’l procurement 45% Local Procurement Fuel Insurance Contractor services Camp General supplies Reagents, chemicals Government 15% Technical consultants Rent Corporate advertising Financial 10% Wages and benefits 18% Local Procurement 12% Other Total operational spending: $644 million Figure 8. Lower-Middle-Income Country Case Source: Procurement figures from company-furnished data. All other figures from 2014 corporate reports. The distinction between local and international procurement is worth exploring. In this paper, we define local as sourced within the country of operations. Local spending by a mining operation plays a significant part in determining its contribution to the community, regional and national economies, in terms of both direct spending and the ripple impacts—indirect and induced impacts—of direct spending (discussed below). There is a marked difference between the proportion of local and international spending in the two case study operations. For the high-income OECD country mines, local procurement amounted to 58 per cent of total IISD.org 23 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector operational expenditures. Of that, 12 per cent was local to the mine sites, 24 per cent was regional and 64 per cent was spent in the host country outside of the region. The lower-middle-income country operation, by contrast, procured only 12 per cent of its goods and services within the host country. This finding is not surprising. We would expect to find greater capacity in domestic suppliers of goods and services in more developed countries. But it has important implications for the way in which the advent of automation will affect the contributions of mining to host country economies—a matter explored more fully below. It is worth noting that even those items recorded as sourced locally will not contribute equally to the host economy. For example, the largest single item procured locally by the lower-middle-income country operation was diesel fuel for its fleet, at 24 per cent of local procurement.10 As the host country produces almost no petroleum products, the main impacts of that “local” purchasing are probably benefits for local re-sellers—a modest economic contribution. In fact, each category of spending will have different “output multipliers.” A dollar spent by a mine on excavator services has direct effects—the actual spending by the mining operator on goods and services. There are also indirect effects: the spending that must be done by suppliers of goods and services in order to meet the demand of direct spending. For example, a portion of a dollar spent on excavation demands some smaller portion of that dollar in turn spent by the supplier on machinery, fuel, maintenance, etc. Each dollar spent on a particular category of expenditure has associated with it a final dollar-value impact that is greater than one dollar, once all the direct and indirect impacts are added up; this is an output multiplier. Spending that involves purchasing imports is not counted, since that money leaves the local economy. Items that involve few imports, such as locally produced food, may have a high output multiplier, while purchase of diesel from importers will have a very low output multiplier (close to 1.0). This is relevant because it suggests that the local procurement of the lower-middle-income country operation, low as it is at 12 per cent of operational spending, may have even less impact than it appears. The less developed the economy, the greater the need to rely on imports of intermediate and capital goods, as well as services. The high-income OECD country operation, by contrast, may be purchasing significant amounts of domestically produced intermediate goods, capital goods and services. A broader output multiplier includes not only direct and indirect effects, but also induced effects of spending. Induced effects occur when the employees drawing pay from direct and indirect spending in turn spend their pay on other goods and services, adding another wave of impacts. If those workers save instead of spending their income, the effect is similar to that of imports—that money does not immediately contribute to the subsequent wave of ongoing economic impacts, and the multiplier effect is diminished. The output multiplier that sums up direct and indirect effects is called the type I multiplier, and one that includes direct, indirect and induced effects is called the type II. Type I multipliers generally underestimate real impacts, since they ignore employees’ spending as consumers, and type II multipliers tend to overstate real impacts because of rigid assumptions about labour income and consumer spending.11 The two output multipliers are sometimes conceived of as the lower- and upper-bound estimates of output impacts. We will use both below to assess the impacts of automation on host economies. 4.2 The Impacts of Automation The technology survey (Section 3) described a number of types of process changes that we might anticipate as drivers for change in the mining sector. It noted that, while there is not enough research into the impact of automation on the size of mining workforce, we have two broad estimates on which to base our scenarios. The 10 11 According to the records, these purchases are only roughly 20 per cent of total fuel purchased—the remainder is recorded as purchased internationally. Type II multipliers treat household consumption as constant, with the ratio of expenditure-to-income fixed for all levels of income. IISD.org 24 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector Cluster Research Report (McNab et al., 2013, p. 16) suggests that the introduction in mines of fully autonomous equipment “would reduce the workforce of a typical open-cut, iron mine by approximately 30 to 40 per cent.” In another report, Accenture (2010) evaluated the economics of three types of equipment (trucks, dozers and drills), suggesting that automation could reduce the number of operators in open pit mines by up to 75 per cent. These two reports are not explicit about the geological and technical conditions of the mines evaluated, so the best employee reduction rate to be applied to our case study sites remains unclear. In order to have a general view of the impact of workforce reduction on local procurement, we build three scenarios of workforce reduction through automation, conservatively bracketing the two estimates cited above with rates of 30, 50 and 70 per cent. Doing so involves going through the detailed procurement accounts for each firm and deciding which would be sensitive to changes in workforce size. This would be the case for worker-related goods such as food, clothing, safety equipment, housing and camp materials. Other categories of spending, such as workers’ insurance, human resources and provided equipment such as cell phones, will also be affected. Beyond the impacts of workforce reduction, we noted above that driverless technology using equipment under control (EUC) will have impacts by saving on fuel consumption. Researchers from the University of British Columbia estimate that driverless technology can bring about a 10–15 per cent decrease in fuel consumption (Spence, 2014). The size of the mining operation as well as the fleet, commodity and mining method are parameters that must be taken into account. However, since there is no literature available, these considerations are not included in this analysis, and we assume a 12.5 per cent decrease in diesel consumption in our scenarios. In addition, assuming that haul trucks in the mine are using EUC and using the rate calculated by Fortescue in its iron mines in Australia, an extra 2.3 per cent in fuel savings could be achieved if they are installed in trucks (Australian Government, Department of Resources, Energy and Tourism, 2014). Therefore, based on the literature review, we assume that mines could save 14.8 per cent in fuel used for hauling if they implement autonomous systems and EUC. Our data set does not show what portion of purchased fuel is used in hauling activities, a figure that will vary from site to site depending on a host of factors. As well as hauling, diesel is used in generators in off-grid sites, and even as a processing fuel. We assume below that 50 per cent of diesel in our sites is dedicated to hauling, and apply a reduction factor of 14.8 per cent to this value. The 50 per cent figure is a conservative estimate that likely underestimates the impacts of fuel savings. 4.2.1 GDP Impacts Figures 9 and 10 show the impacts on local procurement of the three scenarios described above: reductions in workforce of 30, 50 and 70 per cent, combined with savings of 14.8 per cent in fuel locally purchased in all cases. The results indicate minor impacts relative to total local procurement. In the high-income OECD case, local procurement drops by 2, 3 and 4 per cent respectively in the three scenarios. In the lower-middle-income country case, the corresponding figures are 6, 9 and 11 per cent. The main elements of the reductions are employee housing-related expenses, including construction, but safety equipment and employee benefits also feature strongly in the high-income OECD country case. Fuel savings remain constant at a fairly low level irrespective of the workforce reduction scenario. But worker-related expenditures are not the most important elements of local procurement in either case. This is consistent with the data in Figures 7 and 8, where local procurement is broken down into its component parts for both operations. IISD.org 25 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector Figure 9. Impacts Of Automation On Local Procurement (High-Income OECD Country Case) Figure 10. Impacts Of Automation On Local Procurement (Lower-Middle-Income Country Case) Source: The authors Source: The authors Where the operations constitute a large part of a community’s economy—often the case in mining operations— the sort of reductions seen here may be significant at the local level: depending on the scenario, between USD 7.2 million and USD 15.8 million less spent in the high-income OECD case, and between USD 4.6 million and USD 8.9 million less spent in the lower-middle-income country case. In the high-income OECD case, under a 70 per cent scenario, we would see USD 3.3 million less spent in the local communities, and USD 7.6 million less spent in the region. The indirect and induced impacts would amplify these effects. As noted above, not all withdrawals from a local economy will have equal impacts. At the community level, reductions in services such as construction will probably weigh much more heavily per dollar than reductions in fuel purchases, assuming that most of the value of the fuel is imported and most of the value of construction is in the labour provided, and thus is local. While these impacts seem relatively small, they only cover a portion of the total impacts of mining automation. They do not cover the direct loss of wages and salaries for mine employees, and they do not cover the indirect and induced impacts of reduced spending. These elements are introduced in turn below. Figures 11 and 12 show the impacts of automation when salaries and benefits for mine workers are included in the analysis. (Note that while spending on procurement and wages and benefits drops, we assume that payments to government are unchanged). These figures show clearly that while procurement drops in all scenarios, the impacts of reduced payroll are much more significant. In the high-income OECD country case, reduction of wages and benefits are responsible for 86 per cent of the impacts shown here, and in the lower-middle-income country case they are responsible for 92 per cent. IISD.org 26 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector The final impacts are significant in terms of total GDP (output) contributions from the operations. The reduction in those contributions in the high-income OECD case ranges across the three scenarios from 9 to 20 per cent. The corresponding range for the lower-middle-income case is higher: from 13 to 31 per cent. This may seem strange; the latter operation’s salaries are roughly half of the former’s, so the impact of lost wages should be blunted relative to the high-income case. The explanation is that local (national) procurement is much lower in the lower-middleincome country operation (see Figures 7 and 8). So even though payroll is lower in that operation in absolute terms, it makes up a larger percentage of a mine’s contributions to the national economy. Its loss is therefore more significant as a percentage of those contributions. 600 USD Millions 500 400 300 360 352 348 200 343 100 136 95 68 30% 50% 0 Baseline Wages and benifits Local procurement 41 70% Government Misc procurement Figure 11. Impacts Of Automation On GDP Contribution (High-Income OECD Country Case) Source: The authors Figure 12. Impacts Of Automation On GDP Contribution (Lower-Middle-Income Country Case) Source: The authors The effects discussed up to this point have all been strictly direct impacts of mining expenditures. Indirect effects and induced effects are also appropriate to consider, and are routinely described in the literature assessing the beneficial impact of mining investment. Table 1 shows the impacts of automation on national GDP, when output multiplier effects are included.12 Again we considered the three workforce reduction scenarios. 12 Appendix A discusses the limitations of the use of multipliers in this analysis. IISD.org 27 Mining a Mirage? Reassessing the shared-value paradigm in light of the technological advances in the mining sector Table 1. GDP Impacts, With Multipliers Direct Impact Direct + Indirect Direct, Indirect + Induced Total impact as % of total multiplier effects of mine Total impact as % of national GDP High-Income OECD Country Scenarios 30% 55,931,204 75,507,125 92,006,831 8.5%
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