Minerals and Development Olle Östensson, Caromb Consulting

1. Minerals and DevelopmentOlle Östensson, Caromb Consulting

2. Outline of presentation • Introduction: quick references to Chile and Peru • Improving mining’s contribution to development: the national and the local level • Why is it so difficult to build diversified local economies around mining now? • Revenue sharing • Small-scale mining

3. Mining can contribute to poverty reduction: The case of Chile • Chile has become one of South America’s wealthiest countries while relying significantly on mining. Poverty fell by almost half from 1990-03, and by over 60% in Antofagasta • At the same time, Chile has performed well in social and governance indicators • Mining’s value added in Region II about 24% of regional GDP • Purchasing inputs and services from local suppliers (including imported goods). 80% of inputs sourced domestically, half of those in Region II • Escondida Foundation conducts social programs ($15m over 5 years) Chile: Falls in poverty by region, 1990-2003 Antofagasta: Chile’s core mining region Source: Resource Endowment initiative, Chile case study, p.48 8

4. Employment multipliers can be significant • Mining contributes significantly to indirect and induced employment; employment multipliers were 3-4 in Chile, often 8-10 in Africa. • Public-private ‘mining cluster’: government and mining companies invested in education and in ISO certification of enterprises supplying the mining industry Source: Resource Endowment initiative, Chile case study, p.41 9

5. The case of Peru • High mining investment has contributed to significant economic growth at national level • Steady increase in mining revenues transferred to local government through ‘Canon Minero’ system • BUT poverty and social inequality remain high • Social tensions and conflicts at the local level around various mines reported

6. Improving mining’s contribution to development: the national and the local level • Most of the big financial benefits of mining (FDI, exports, government revenue etc) accrue nationally… • …but the physical and human impacts are mostly at the community level • It follows that: • Mining’s contribution greatly depends on how these large central government revenues are used • Mining’s (small) employment contribution is mainly at local level, and displacement of local labor (e.g. artisanal miners) can result in a significant negative effect on livelihoods locally • Local procurement can have significant additional indirect effects on total employment and incomes. But the opportunity for these effects to be realized is often overlooked, both by governments and by investors. In weakly developed economies they must be actively fostered. 7

7. Improving mining’s contribution to development: the national and the local level • At the national level, through fiscal links • Transparency and accountability for revenues • Fiscal policy targets to be met over entire business cycle • At the local/regional level • Visibility of mining revenue • Improving local capacity • Transparent revenue sharing mechanisms

8. Mining and regional development • What happened with mining 100 years ago in the countries that are now developed? (Canada, the Nordic countries) • Mining led to metals production, manufactured goods exports • Employment generation, skills accumulation: good jobs and lots of them • Supporting industries established, based on innovation: mining equipment, service providers • What happens in developing countries today? • Few linkages to other sectors, mine workers’ wages are the main stimulus to local economies - but they can be important, 8-10 new jobs per mine worker is common in Africa • Little innovation • Widening income differences • Crowding out of other sectors • Social friction and conflict

9. Why is it so difficult to build diversified local economies around mining now? • With today’s metals prices, the money is there, but… • Globalization means that • Inputs can be imported because transport costs and tariffs are lower, therefore difficult to build backward links • Processed products are exposed to international competition, therefore no forward links • Processes are standardized and mechanized: there is little room for using the advantage of low local labour costs • Skills do not have to be developed locally, experts can easily be brought in, therefore fewer high quality jobs are filled by locals • Easy access to state of the art technology reduces need for local innovation • Widespread poverty and overpopulation mean that • There will always be unmet demands for jobs • Many have an incentive to act outside the law

10. Solutions • Nurturing of clusters through partnerships between government and companies • The Chilean example • In Mozambique, the establishment of the Mosal aluminium smelter led to local job creation along a corridor stretching from the border with South Africa to Maputo • Pro-active procurement policy of companies, combined with training and technical assistance • Anglo American has met its obligations under the Black Empowerment Programme in South Africa by improving the capacity of small and medium enterprises among its suppliers

11. Solutions (cont’d) • Empowering communities • In Papua New Guinea, local development committees have the final word on all development projects, including those connected with mining • Regional development planning: • Local governments usually do not have the capacity to plan for long term development, and the capacity has to be built • Development planning has to be inclusive and participatory – nobody can be left out and decision making has to be for real • The process and its results have to be visible and the actors have to be accountable

12. Revenue sharing • Would it help if spending decisions were made by local governments? • Distinguish between delegation of taxation authority (only in federal states) and sharing of revenues • Most common in Latin America and Asia, often the outcome of conflicts between the centre and regions • UNCTAD/ICMM case studies of four countries, 2006 • Two countries (Ghana and Peru) had revenue sharing mechanisms, little significant local development • Two countries (Chile and Tanzania) determined spending centrally, better results • Lack of planning capacity at local level • Weakness for bricks and mortar and for prestige projects (municipal swimming pools and government offices)

13. Peru • Long history of conflict between centre and the regions and of oppression of rural population • The Canon Minero was introduced to share benefits more equally • Resulted in enormous income transfers (at present, about US$ 2 billion/year), but • Long implementation delays • Limited to capital investment • Large inequalities between communities • Only the municipality where the mine is located gets funds • Many white elephants (new municipal offices) • Lack of local planning capacity and insufficient support from central government

14. Peru, cont’d • Therefore, changes to the Canon Minero aiming to share revenues more equally among all regions, but most still goes to the mining regions • the ProgramaMinero de Solidaridad con el Pueblo (PMSP) • Voluntary support by mining companies to local development, facilitated by a framework drawn up at the national level • Most mining companies in Peru, and all foreign investors, have PMSP programmes, which often include capacity building elements • Mainly very good results • Lack of clarity about the role of government and investors

15. Small-scale mining: A neglected poverty problem • Small-scale mining is big: 20+ million people in the world, all of them poor • Environmental damage: deforestation, erosion, destruction of water courses, mercury • Safety hazards: accidents, disease, mercury • Social problems: crime, drugs, prostitution • Costs to economy: loss of agricultural labour, lack of investment, low productivity, no processing, inequitable allocation of revenues along supply chain

16. Solutions • Raise productivity: training, improved equipment • Eliminate mercury as hazard to health and environment: better equipment, alternative technologies • Legalize and integrate: titles to mining claims, preference for local people • Change the distribution of revenues: organizational support, licensing of dealers • Processing: training, capacity building, fair trade schemes • Communities and small-scale mining (CASM, UK, World Bank), workshops, grants, training, networking

17. THANKS!olleostensson@gmail.com