Socio-economic assessment in the extractive industries—Avoiding the pitfalls

Socio-economic assessment in the extractive industries—Avoiding the pitfalls

G Model EXIS 151 No. of Pages 5 The Extractive Industries and Society xxx (2015) xxx–xxx Contents lists available at ScienceDirect The Extractive I...

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G Model EXIS 151 No. of Pages 5

The Extractive Industries and Society xxx (2015) xxx–xxx

Contents lists available at ScienceDirect

The Extractive Industries and Society journal homepage: www.elsevier.com/locate/exis

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Socio-economic assessment in the extractive industries—Avoiding the pitfalls Sophie Upson* , Carl Clarke Risk & Policy Analysts Ltd., Farthing Green House, 1 Beccles Road, Loddon, Norfolk, NR14 6LT, UK

A R T I C L E I N F O

A B S T R A C T

Article history: Received 9 July 2015 Received in revised form 9 October 2015

There is increasing interest in the use of socio-economic assessment (SEA) as a tool to support regulatory decision-making and to help businesses maintain their social licence to operate. However, its application in the extractive industries remains unclear. Minerals and metals move through a complex and dynamic global supply chain, which makes it difficult to ‘assign’ socio-economic impacts to any one location. Intermediate products (e.g. metals) generally comprise many different inputs – some of which may be used in very small quantities but, nevertheless, impart essential and/or valuable properties to the final product – making it challenging to assign values. The SEA process is made even more complex by the diverse range of downstream applications which these products have, the potential for future innovation and a lack of reliable socio-economic statistics for the sector. In 2013/14, Risk & Policy Analysts Ltd undertook the first global study on the socio-economic value for manganese (Mn). This paper describes the key obstacles identified while undertaking this research and outlines some of the steps that were taken to ensure a robust SEA. It highlights important lessons that should be taken forward when undertaking future SEAs in the extractive industries. ã 2015 Elsevier Ltd. All rights reserved.

Available online xxx Keywords: Socio-economic assessment (SEA) Manganese (Mn) Extractive industries Supply chains

1. Introduction Manganese (chemical symbol: Mn) is one of the most widely used and versatile naturally-occurring elements in the world.1 But despite its prevalence in (and obvious benefits to) our daily lives, the strategic importance and socio-economic value of Mn has largely gone unnoticed by decision-makers and the general public. To address this, the International Manganese Institute (IMnI) commissioned Risk & Policy Analysts Ltd (RPA) to undertake the first global study on the socio-economic value of Mn (Table 1). The study, undertaken in 2013/14, sought to analyse the socioeconomic importance of Mn ore and Mn alloys globally, at a

* Corresponding author. E-mail addresses: [email protected] (S. Upson), [email protected] (C. Clarke). 1 Mn, in the form of Mn alloys, is an essential input and process additive for the steel industry (in fact, you cannot make steel without Mn); a vital element in the manufacture of some dry cell and other batteries (notably, those used in electric vehicles); and is necessary for the production of some aluminium alloys (e.g. those used for beverage cans) and consumer electronics (e.g. television circuit boards). It is crucial for maintaining the health and well-being of the human body and is thus used in food supplements and medicines. It is also a crucial micronutrient needed for plant growth and hence plays a vital role in agricultural production (fertilizers, fungicides). In addition, it is used in animal feed and water purification products.

regional level and in key producing countries. Basic production and economic data were employed, together with modelling tools, to estimate the direct and indirect economic value of Mn ore and alloy production, as well as their effects on employment (jobs and wages). Based on a top-down analysis of the key supply chains for Mn, the study also set out, in economic terms, the criticality of Mn in some of its key applications (e.g. steel), taking into account the unique and specific physical and chemical properties of Mn and the qualities that it imparts to particular products. Case studies were used to contextualise the results of the statistical modelling and to illustrate, qualitatively, some of the benefits of Mn that were more difficult to quantify. This paper describes the main hurdles identified while undertaking the first socio-economic assessment (SEA) of Mn. It outlines some of the steps that were taken to overcome these challenges to ensure a robust SEA for Mn, and highlights key lessons that should be taken forward in undertaking future SEAs in the extractive industries. 2. Socio-economic assessment (SEA) and the extractive industries As a term, SEA encompasses a set of analytical tools and approaches for analysing the net social and economic impacts

http://dx.doi.org/10.1016/j.exis.2015.10.003 2214-790X/ ã 2015 Elsevier Ltd. All rights reserved.

Please cite this article in press as: S. Upson, C. Clarke, Socio-economic assessment in the extractive industries—Avoiding the pitfalls, Extr. Ind. Soc. (2015), http://dx.doi.org/10.1016/j.exis.2015.10.003

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Table 1 Key findings from the Mn SEA. Product

Indicator

Mn ore

Economic contribution to the global economy (US$ billion per year)

Global employment (number of workers employed)

Low estimate

High estimate

Direct Indirect Total Direct Indirect and induced Total

10.2 11.0 21.2 44,000 33,000 77,000 2.7

11.1 11.9 23.0 78,000 59,000 137,000 4.6

Direct Indirect Total Direct Indirect and induced Total

23 123 146 67,000 217,000 284,000 613

86,000 278,000 364,000 796

Total wages paid to direct employees (worldwide, US$ billion per year) Mn alloy

Economic contribution to the global economy (US$ billion per year)

Global employment (number of workers employed)

Total wages paid to direct employees (worldwide, US$ million per year) Source: RPA, 2015.

associated with a specific product, process or activity. It is an important tool for assessing the total contribution of a specific company, sector or activity to the economy, its overall impacts on society as a whole, and the trade-offs involved in any policy decision. Over the past decade, the use of SEA to support regulatory decision-making has grown and is playing an increasing role in the development of environmental and health protection legislation in the European Union (EU)2 and elsewhere. Businesses and industry associations are also increasingly interested in measuring their socio-economic impact as part of maintaining their social license to operate, improving the business enabling environment, strengthening their value chains, and fuelling product and service innovation (PWC, 2013). The scope of a SEA – what impacts are addressed and in what detail – can vary widely and guidance on its execution does not always specify what is required or what would be sufficient. Thus, a plethora of tools have emerged to assist businesses with measuring their socio-economic impact, all based on different assumptions, offering different functionality, focusing on different types of impact and suiting different purposes (PWC, 2013). Table 2 indicates the types of socio-economic impacts that are frequently considered. In the extractive industries, the use of SEA has been relatively limited to date, although interest in its use is clearly growing across the sector. Mining companies will normally prepare economic impact studies when seeking to open a new mine. However, these generally focus on immediate impacts (such as number of workers to be employed, capital investments and corporation taxes) and, to date, have rarely been used to assess social and economic impacts up and down the supply chain. In 2000, Stilwell and Minnitt published a paper discussing the potential application of input–output analysis3 to individual production facilities in the mining sector (Stilwell and Minnitt, 2000). Their paper explained

2 Within the EU, for example, the REACH Regulation requires the use of SEA, under certain conditions, as part of the Authorisation process and strongly encourages Member States to prepare SEAs to justify proposed restrictions. 3 The fundamental idea underpinning input–output methods is that sectors in an economy are linked through the demand for material inputs and the sales of intermediate output. It is these links or interdependencies that give rise to ‘multiplier effects’ across the economy when there is a change in economic activity. In the Mn industry, for example, output from the Mn ore industry (Mn ore) becomes input to the Mn alloy industry (Mn alloy), but also generates economic output in other sectors of the economy (e.g. in transport, energy, construction and so on). Input–output analysis is therefore a valuable method for estimating economy-wide impacts.

the basic principles of input–output analysis, and presented an example of its application to a simplistic model of a mine, which was used in the absence of any real data. Kapstein and Kim (2011) provide a study of the socio-economic impacts of the Kenyasi mine operated by Newmont Ghana Gold Limited (NGGL) in the BrongAhafo Region of Ghana. For this study, the authors’ gathered quantitative data from NGGL and used input–output analysis to generate estimates of the mine’s effects on macro-economic variables such as employment, tax revenues, household incomes, the balance of payments, and supplier profits. The researchers also conducted interviews to gather qualitative information to assess NGGL’s relations with its immediate community and with a variety of stakeholders within Ghana. At the product level, SEA has been used by the Weinberg Group (2008) to assess the socio-economic benefits associated with the production and use of nickel in Europe. Unlike many preceding SEAs, the study included an analysis of the criticality and substitutability of nickel and nickel-containing materials in their various applications. More recently, SEA has also been used to assess the possible future benefits of mineral extraction. For example, a study conducted for the Ghana Chamber of Mines and The International Council on Mining and Metals (ICMM) (Steward Redqueen & African Center for Economic Transformation, 2015) brings together historic and forward-looking data from seven gold mining operations in Ghana to explore the past and projected, direct and indirect benefits of gold mining in Ghana. 3. The challenges in using SEA in the extractive industries The extractive industries pose a particular challenge for undertaking SEA. In recent decades, global supply chains for essential raw materials have become increasingly complex. Minerals and metals may be extracted (in some cases by artisanal or small scale miners) and passed to local consolidators, before being traded between neighbouring countries and then shipped throughout the world. These trade routes are, however, highly dynamic and price volatility in the market for minerals/metals and political instability, amongst other factors, can lead to significant shifts in patterns of international trade. Smelters and other larger processors have also been identified as a critical point for supply chain traceability as they frequently combine materials from multiple sources. Down the supply chain, minerals and metals often find their way into patented technology and businesses may be hesitant to reveal information about their suppliers/purchasers for fear it could run counter to their business interests.

Please cite this article in press as: S. Upson, C. Clarke, Socio-economic assessment in the extractive industries—Avoiding the pitfalls, Extr. Ind. Soc. (2015), http://dx.doi.org/10.1016/j.exis.2015.10.003

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S. Upson, C. Clarke / The Extractive Industries and Society xxx (2015) xxx–xxx Table 2 Standard economic impacts considered in a socio-economic analysis. Product value  Revenue (sales)  Foreign trade/exchange effects

Operations  Capital expenditure  Capital investment (new facilities)  R&D  Social responsibility

Value added  Impacts on gross domestic product (GDP)  Multiplier effects within national economies  Tax revenues  Enabling benefits

Employment  Direct effects  Indirect effects  Induced effects  Wages

In the context of SEA, a lack of traceability in the supply chain can make it difficult to allocate socio-economic impacts to any one location. While this may pose an issue for a regional or companyspecific SEA (leading to an over- or under-estimation of the total impacts within a specific area), at a global level, leakage effects are less problematic. In the case of Mn, for example, it was possible to estimate the total global economic and employment effects of Mn ore and Mn alloy production, by employing economic and employment multipliers4 and country-level production data. While there is some uncertainty concerning the exact geographical location of economic and employment effects, by measuring and reporting impacts at a global scale, the issue of national/regional leakage is circumvented. Input-output multipliers for the extractive industries are few and far between and, where available, are generally aggregated at a very high level. Indeed, the most up-to-date and relevant multipliers identified during an extensive literature review undertaken for the Mn SEA were from the mid-2000s for the generic categories of ‘basic metals’ (for Mn alloy) and ‘mining and quarrying’ (for Mn ore). While some countries may have more specific input–output tables that can be used to estimate economic impacts within that country, these data are generally not appropriate for making international comparisons, or global assessments, due to methodological differences in the way they have been estimated or due to the adoption of different sectoral aggregations. Thus, future SEAs in the extractive industries will need to ensure that appropriate ‘sense checking’ of the data is undertaken. To ensure the robustness of the SEA for Mn, economic input-output multipliers were gathered from a single source (OECD) and estimates of the total economic contribution of Mn ore/alloy were sense checked by comparing them to each country’s GDP. Accurate employment data in the extractive industries are equally hard to come by. Companies operating in the extractive industries generally produce many different products, some of which may emerge simultaneously. Mn ore, for example, can be found – and therefore mined – in combination with iron ore and other minerals, and it is therefore difficult to attribute employment to one material or another. While some companies report their total employment figures (e.g. in annual reports), geographically explicit employment data, aggregated at a product level, are generally not available; at least not in the public domain. It is also important to remember that different companies may subcontract services to a greater or lesser degree (e.g. in one company,

4 A multiplier is quite simply a parameter that expresses the ratio of a change in aggregate output to a change in aggregate demand. A multiplier of 0.5, for example, simply means that for every $1000 created directly by the production of Mn ore or Mn alloy, an additional $500 is created indirectly in the supply chain.

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IT services may be provided in-house, while in another company, such services may be sub-contracted), which can make it challenging to interpret companies’ employment figures. Where employment data are available, caution should be exercised in making extrapolations. One of the findings of the Mn study was that different operators in the extractive industries have widely varying efficiencies of production and hence different labour productivities. This can be seen both within a given country (e.g. India) and when looking across countries (e.g. India vs. Australia). Careful questionnaire design and sense checking of the data provided by stakeholders are therefore crucial for gathering accurate employment figures. As a result of these uncertainties, the SEA for Mn had to provide a very large range of possible employment figures. In China, for example, it was estimated that between 82,000 and 120,000 people are employed directly in the production of Mn ore and Mn alloy. While it is not possible to pinpoint an exact employment figure, the data are valuable in that they indicate the scale of economic activity attributable to Mn-related extraction activities. It is clear from these data, for example, that Mn plays a vital role in sustaining the livelihoods of tens of thousands of people – a number far larger than might have been anticipated given the relatively low profile of Mn. Like the SEA for Mn, recent SEAs in the extractive industries (e.g. Weinberg Group, 2008) have begun to include a ‘criticality assessment’ to help avoid over-estimating socio-economic benefits. In the case of the SEA for Mn, a detailed assessment was carried out of the criticality and substitutability of Mn to the primary, intermediate and final products' in which it is used. Mn, for example, is not the only ingredient used in the production of Mn alloys. Indeed, the smelting of Mn alloy involves combining Mn ore with various forms of iron, silicon and several other elements. This poses a challenge for undertaking SEA because the question then arises of how to apportion benefits to Mn, when it is just one of many inputs to production. It is obvious that Mn is critical to the production of Mn alloys, and so the entire value of Mn alloy production (an estimated US$ 23 billion in 2013) can be attributed to the production and use of Mn ore. However, at a more specific product level, there may be the potential for substitution of Mn in some uses. For example, Mn is intentionally present and used as an alloying element in almost all grades of steel, including some stainless steels. While in some applications, alternative materials (e.g. plastics, wood or other metals) could be used as an alternative to steel, with only a small incremental cost or performance penalty – in other instances, the use of substitutes would result in significant cost increases or performance losses. The total cost of substitution for Mn throughout its entire supply chain would be virtually impossible to estimate given the broad spectrum of applications in which Mn is used (e.g. steel, batteries, aluminium alloys, consumer electronics, agricultural fertilizers, food supplements and medicines to name but a few). The SEA for Mn, therefore, relied on the use of illustrative case studies. It is important to remember that criticality in the context of elements, such as Mn, is not determined solely by metallurgy. For example, the addition of Mn to stainless steel promotes the stability of an austenitic crystalline structure. While nickel (Ni) is also an austenite forming element, Mn is able to achieve the same effect at a much lower cost and it this which led metallurgists to develop high Mn content 200-series stainless steels in the 1950s. Thus, Mn is cost-critical to this particular application. As an example, an illustrative criticality assessment for 200series stainless steel is provided in Fig. 1. A key aspect that has been overlooked in many SEAs is the products’ future value to society. In the case of Mn, for example, development of the lithium manganese oxide battery could potentially offer the opportunity for the wide-scale introduction

Please cite this article in press as: S. Upson, C. Clarke, Socio-economic assessment in the extractive industries—Avoiding the pitfalls, Extr. Ind. Soc. (2015), http://dx.doi.org/10.1016/j.exis.2015.10.003

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RAW MATERIAL

PRIMARY PRODUCT

INTERMEDIATE PRODUCT

FINAL PRODUCT

Mn ore

Mn alloy

200-series stainless steel

Affordable stainless steel kitchenware

What would be the cost to stakeholders if they were forced to switch to substitute products that are not based on Mn?

Without Mn ore, Mn alloys would not exist. There is no substitute for Mn ore in Mn alloy.

The total economic value of Mn alloy can therefore be attributed to Mn ore.

US$ 23 billion per year

Without Mn alloys, 200series stainless steel would not exist. There is no substitute for Mn alloy in 200-series stainless steel.

The total economic value of 200-series stainless steel can therefore be attributed to Mn ore. US$ 12.7 billion to US$ 25.4 billion per year

If 200-series stainless steel was no longer available, some users of 200series stainless steel would switch to using (more expensive) 300-series stainless steel, others might switch to using a different type of steel or a different substance altogether (e.g. wood or plastic). If a substitute is not available for a specific application, or if it would be too costly to use an alternative material, then production would cease. To some extent, the economic value of 200-series stainless steel kitchenware could be estimated as the cost-difference between 200series and 300-series stainless steel. However, adjustments would need to be made for the amount of steel that would be required for its final application. In cases where a substitute is not available, the total economic value of production could be attributed to Mn ore.

Value uncertain Fig. 1. Process for determining the economic value of Mn in the context of 200-series stainless steel.

of battery-powered electric vehicles, which could have significant benefits in terms of reducing CO2 emissions. Mn-based Twinning Induced Plasticity (TWIP) steels also have significant potential for use in future automotive applications, mainly due to their potential to increase vehicles' crashworthiness and reduce vehicle weight. However, the potential value of an element’s use in the future is inherently uncertain. SEAs must therefore rely on carefully selected case studies, extrapolations and estimations to illustrate how a product's value or importance might change over the course of time. Consultation is an important part of the process for undertaking SEA, but can be challenging. On the one hand, actors in the sector may not understand the potential value in undertaking an SEA and may not see the provision of such information as a priority. The SEA process requires the collection of information that is not generally required by regulators or investors and so the information required for an SEA is not likely to be readily available and may be timeconsuming to collect. Actors in the sector may also be hesitant to provide any information about their operations for fear that competitors might use it to gain a competitive advantage. Hence, confidentiality or non-disclosure agreements are likely to be necessary to impart confidence that sensitive information will be handled properly. In the USA, the lack of traceability and transparency in the supply chain for some minerals has recently been confronted by legislators through the implementation of Section 1502 of the Dodd–Frank Wall Street Reform and Consumer Protection Act. To comply with the Dodd–Frank Act – which was signed into law in 2010 – publicly listed companies in the USA that purchase ‘conflict minerals’ (defined by the US Secretary of State as cassiterite (tin), columbite-Tantalite (tantalum), wolframite (tungsten) and gold, or their derivatives) from the Democratic Republic of Congo or adjoining countries, are legally required to carry out due diligence

over the source of the metals and then establish some form of chain of custody over them. Similar requirements have also been discussed in the EU5 , Canada6 and elsewhere and, although the Canadian parliament recently voted against Bill C-486, a general move towards greater transparency in the supply chain for some minerals and metals may mean that better data are available in the future for undertaking SEAs. 4. Conclusion In conclusion, the extractive industries pose a particular challenge for undertaking SEA. Minerals and metals move through a complex and dynamic global supply chain and are used in a diverse range of downstream applications. Intermediate products (e.g. metals, chemicals) generally comprise many different inputs – some of which may be used in very small quantities but, nevertheless, impart essential and/or valuable properties to the final product. The SEA process is made even more complex by the potential for future innovation and a lack of reliable socioeconomic statistics for the sector, where this includes basic employment data, input-output multipliers, etc. In undertaking our SEA for Mn, a methodology has been

5 European Commission (2014): proposal for a regulation of the European Parliament and of the council setting up a union system for supply chain due diligence self-certification of responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas, COM (2014) 111 Final, available at: http://trade.ec.europa.eu/doclib/docs/2014/march/tradoc_152227.pdf. 6 Parliament of Canada (2013): C-486. An Act respecting corporate practices relating to the extraction, processing, purchase, trade and use of conflict minerals from the Great Lakes Region of Africa, available at: http://www.parl.gc.ca/LegisInfo/ BillDetails.aspx?Language=E&Mode=1&billId=6052043.

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developed that overcomes the very real challenges posed by SEA in the extractive industries. Key lessons to be taken forward in future SEAs include carrying out appropriate ‘sense checks’ of the data to ensure that the calculated impacts are accurate and do not reflect significant over- or under-estimates; careful design of the consultation process to explain the value of SEA to potential stakeholders and instil confidence that sensitive information will be handled properly; rigorously thought-through questionnaires to ensure the information gathered from different companies is consistently reported; assessment of the criticality of the substance in its downstream applications to avoid over-estimating potential benefits and the use of illustrative case studies where impacts (e.g. future benefits arising from innovation) cannot be easily monetized. It is hoped that these important lessons will be taken forward in future SEAs for the extractive industries. Acknowledgements The research for the socio-economic analysis used as the basis for writing this article has been funded by the International Manganese Institute with a more detailed, commercially restricted report provided to the International Manganese Institute. The authors would like to thank Anne Tremblay and Keven Harlow of the International Manganese Institute for their feedback and Meg Postle, Tobe Nwaogu and Anna Heinevetter of Risk & Policy Analysts Ltd for their support in developing the approach, data collection and analysis. The authors would also like to thank

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representatives of Mn producing companies that provided data for the analysis. References COM, 2014. 111 Final, available from: http://trade.ec.europa.eu/doclib/docs/2014/ march/tradoc_152227.pdf. European Commission, 2014. Proposal for a Regulation of the European Parliament and of the Council setting up a Union system for supply chain due diligence selfcertification of responsible importers of tin, tantalum and tungsten, their ores, and gold originating in conflict-affected and high-risk areas. Kapstein, E., Kim, R., 2011. The Socio-Economic Impact of Newmont Ghana Gold Limited, available at: http://www.newmont.com/files/doc_downloads/africa/ ahafo/environmental/ Socio_Economic_Impact_of_Newmont_Ghana_Gold_July_2011_0_0.pdf. Parliament of Canada, 2013. C-486. An Act respecting corporate practices relating to the extraction, processing, purchase, trade and use of conflict minerals from the Great Lakes Region of Africa, available from: http://www.parl.gc.ca/LegisInfo/ BillDetails.aspx?Language=E&Mode=1&billId=6052043. PWC, 2013. Measuring socio-economic impact—A guide for business, Study for the World Business Council for Sustainable Development, available at: http://www. pwc.com/en_GX/gx/sustainability/publications/assets/pwc-wbcsd-guide-tomeasuring-impact.pdf. RPA, 2015. Manganese – The Global Picture – A Socio Economic Assessment, Report for the International Manganese Institute, Loddon, Norfolk, UK. Steward Redqueen & African Center for Economic Transformation, 2015. Mining in Ghana—What Future Can We Expect, available at: http://www.icmm.com/ document/9151. Stilwell, L.C., Minnitt, R.C.A., 2000. Input–output analysis: its potential application to the mining industry, The Journal of The South African Institute of Mining and Metallurgy, available at: http://www.saimm.co.za/Journal/v100n07p455.pdf. Weinberg Group, 2008. Nickel in society, Study for the Nickel Institute, available at: http://www.nickelinstitute.org//media/Files/MediaCenter/NiInSociety/ NiInSoc-EN.ashx.

Please cite this article in press as: S. Upson, C. Clarke, Socio-economic assessment in the extractive industries—Avoiding the pitfalls, Extr. Ind. Soc. (2015), http://dx.doi.org/10.1016/j.exis.2015.10.003