CHAPTER 8 MINERALS AND ECONOMIC DEVELOPMENT · decision-making and may foster the kind of...

CHAPTER 8

MINERALS AND ECONOMIC DEVELOPMENT

172 Minerals Production and National Economic Development

174 External Market Forces

176 Internal Economic Stresses

177 Political Economy

177 Capturing Mineral Wealth

181 Managing and Distributing Mineral Wealth

182 Distributing Wealth

183 Life After Mining

184 Coping with Resource Depletion

184 Corruption

185 Mining and Corruption

186 International Action Against Corruption

186 Fighting Corruption at Home

188 Protecting and Promoting Human Rights

189 Security Forces

189 Labour Rights and the Repression of Trade Unions

190 ‘Pariah’ States

191 A Fresh Commitment to Human Rights

192 The Impact of Conflict

193 The Way Forward

193 Attracting Investment

193 Global Markets

194 Managing and Distributing Mineral Wealth

194 Transparency in the Management of Mineral Wealth

194 Combating Corruption

195 Promoting and Protecting Human Rights

195 Preventing Conflict

196 Endnotes

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Realizing the potential for mining to contribute todevelopment in all countries where it takes place isarguably one of the greatest priorities facing themining and minerals sector.

Mining should bring extensive economic benefits.Thisis particularly important for poor countries and regionsthat lack alternative sources of development and areotherwise unattractive to foreign investors. Providedcertain conditions are met – such as an appropriate legaland policy framework, an adequate level of politicalstability, and well-defined property rights – foreigninvestors are likely to be drawn to rich mineral deposits.

In the last decade, a great deal has been done toestablish enabling frameworks for mineral investment,particularly in developing countries. Much of this isdue to the World Bank.This has resulted in asubstantial flow of investment, creating newopportunities as well as challenges.The opportunitiesinclude hard-currency earnings in economies wherethey are scarce, increased government revenues, jobs,improved education and skills development, and thedevelopment of infrastructure such as roads, electricity,and telecommunications.

Although many countries have benefited greatly fromminerals extraction, for a number of reasons othershave failed to capitalize on the opportunities broughtby mining.The ability to manage mineral wealtheffectively has lagged behind the ability to attractmineral investment.A key challenge now for manycountries is to develop policy frameworks to ensurethat mineral wealth is captured and creates lastingbenefits for local communities and the broaderpopulation.This framework must recognize thatproduction from a specific mineral deposit has a finitelife span; when the mine closes, it is vital that there issomething to show for it in the form of improvedstocks of other forms of capital.

A further challenge is for producer countries to beable to maximize the value-added from minerals.In particular, developing countries must be providedwith more opportunities to do so. Markets thatwelcome primary products must not discriminateagainst products that have been further processed in the exporting country.

Minerals development creates power for those whoshare in it – and potentially competition for access to

it. In countries where governance is weak, this mayhave a corrosive effect on social and political life(sometimes associated with corruption and humanrights abuses) and can exacerbate unresolved socialtensions, including issues of national versus localauthority.The policy framework must provide themeans to ensure that various rights and interests arerespected and to resolve conflicts when they arise.

This chapter examines these issues more closely –looking at the economic impact of mining at thenational level, particularly in developing countries, andat the steps governments, industry, and civil society cantake to ensure that mining and minerals developmentcontribute to equitable and sustainable humandevelopment.

Minerals Production and National EconomicDevelopment

Many of the world’s richest countries have benefitedgreatly from minerals extraction.Australia, Canada,Finland, Sweden, and the United States, for example,have all had extensive minerals industries and usedthem as a platform for broad-based industrialdevelopment.1 By any standards, these are now some ofthe world’s most successful economies: in 2001 all fivewere among the top 10 countries in the HumanDevelopment Index prepared by the United NationsDevelopment Programme (UNDP).2 Moreover, inthese countries minerals development seems by at leastsome measures to have brought benefits specifically toregions with mines. In nineteenth-century Australia,for instance, mineral exploitation brought developmentto the states of Victoria and Western Australia.

In more recent years, a number of developingcountries can also point to minerals-led development.It is often the case that such countries are trying toleapfrog the development process and the developmentof governance structures in short periods of 10 to 30years. Chile, whose copper production accounts for35% of world output, is now among the group of ‘highhuman development’ countries (ranked 39th byUNDP).3 Here, too, many of the rewards have beenreaped locally: the mining capital of Antofagasta isrelatively prosperous and over the last 20 yearsunemployment has fallen despite the arrival ofimmigrants from other regions. (See Figure 8–1.)Africa can also provide positive examples: one of the

MMSD BREAKING NEW GROUND

THE MINING, MINERALS AND SUSTAINABLE DEVELOPMENT PROJECT MMSD172

MINERALS AND ECONOMIC DEVELOPMENT CHAPTER 8

MMSD THE MINING, MINERALS AND SUSTAINABLE DEVELOPMENT PROJECT 173

Supermarkets

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Figure 8–1. Changes in the Economy of Antofagasta, Region II, Chile, 1980–2000Source: Tomic (2001)

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most successful mining countries has been Botswana,a major producer of gem diamonds that has also hadone of the world’s highest economic growth rates –averaging 9% annually in 1996–99.4 But some othercountries with mineral development seem to havebeen considerably less successful.

There are a number of ways of deciding whichcountries qualify as ‘mineral economies’: mineralsoutput can be set against gross domestic product(GDP), or the dependence of foreign-exchangeearnings on mineral exports can be considered.5

(See Chapter 2.) In 34 nations, mainly developing and transitional economies, exports of metals, ores,and fuels (including oil) represented 25% or more of total merchandise exports in 1999.6 Another indicationof minerals dependency is the proportion ofgovernment revenue that comes from mining. Somecountries derive 30–50% of their fiscal income from a single company.

Whatever measure is used, a review of economies withsignificant mineral development finds countries at boththe top and the bottom of UNDP’s HumanDevelopment Index. Mineral wealth is clearly not asufficient condition for successful economicdevelopment. Nor is it even a necessary one: many ofthe world’s most successful countries in recent decades,including the newly industrializing countries of Eastand South-east Asia, have had few mineral deposits.If managed effectively, however, the minerals sector has the potential to play an important role in nationaland local economic development.

How should a country expect to gain from theminerals sector? One of the most immediate waysshould be through additional employment – bothdirect and indirect. Mining activity should alsogenerate new infrastructure such as roads, railway lines,electricity supplies, schools, and hospitals that, althoughprovided for the minerals industry and its work force,can also benefit the rest of the population.At the local

level, it should contribute to the development of skillsand local businesses. Meanwhile the economy as awhole can be stimulated as minerals companies forgemultiple outward linkages – backwards to industriesthat supply goods and services, or forwards toindustries that process mineral outputs.World Bankstudies of mining activities around the world suggestthat every dollar that a company spends on a minegenerates another US$2.80 elsewhere in the economy.7

Finally, there are more general economic benefits,including injections of hard currency that strengthenthe balance of payments, along with royalty paymentsand corporate taxes that boost government revenues.

These and other potential benefits are by no meansautomatic, however.Any country that wishes totranslate mineral wealth in the ground into humandevelopment for its people faces stiff challenges.These include:

• demonstrating minerals potential and attractingexploration and development investment;

• establishing an attractive investment climate andprogressive minerals policies;

• developing a domestic mineral-sector infrastructure;• creating and sustaining mineral wealth while

protecting environmental quality and other socialand cultural values;

• sharing the surpluses or economic rents frommineral production equitably among different levelsof government, local communities, and miningcompanies;

• converting non-renewable resources (mineral wealth)into renewable ones by investing in physical andhuman capital, and doing so in a way that also helpsprotect the interests of future generations;

• maintaining a stable economic environment whilecoping with the exchange-rate impact of mineralexports, fluctuating international commodity prices,and the demands for structural adjustment; and

• dealing with the potential impact of the miningsector on crucial issues of governance, in particularcorruption, regional tensions over how revenue isshared, human rights, and conflict.

These challenges are discussed at length later in thischapter.

Why do many countries seem to have fallen short ofrealizing the economic development potential ofminerals production? There are three main schools of

thought.The first blames external market forces – andmore specifically, volatile or low commodity prices.The second emphasizes internal economic stresses,arguing that a large natural resource base can cause theeconomy to veer off in one direction and destabilize ordamage other sectors.The third argues that windfallmineral revenues tend to distort processes of economicdecision-making and may foster the kind of corruptionthat undermines political and social institutions.

External Market ForcesWorld prices for mineral products have unquestionablyfallen relative to the prices of manufactured goods overthe past two decades. Some economists have arguedthat this was not inevitable – that the declines ofrecent years resulted from a number of random shocksand thus do not indicate a consistent, predictabletrend.8 Others, however, suggest that mineral pricesdropped when production costs fell as a result oftechnological innovation.9 If mining companies areselling fungible products on commodity exchanges,there is scant room to compete by offering better orinnovative products. Instead, companies have littlechoice but to focus on being low-cost producers – byseeking operational improvements at existingoperations, undertaking grassroots exploration in searchof high-quality deposits, acquiring developedproperties during the bottom of the mineral-pricecycle, and carrying out research and development toimprove production processes.

There is a related possibility that deserves someexploration.As new low-cost producers come on themarket, or as older mines retool to lower costs,economic analysis would predict an exodus of mines atthe other end of the curve – the high-cost, marginalproducers.While this certainly does occur to someextent, the exit of high-cost or unprofitable producerstends to be slowed, perhaps for three reasons.

First, particularly where mining is an importantemployer and there are few alternatives, governmentsdo not want to deal with the social and political falloutfrom closing mines, and therefore find ways tosubsidize them. Bolivia, Ukraine, Serbia, and theUnited Kingdom are a few countries where minersthreatened with layoffs have had a destabilizing effecton politics. In such circumstances, governments usesubsidies to deflect the problems, and many of thesubsidies continue years after they became established.





Sometimes they even extend to taking over mines andrunning them as state enterprises when privatecompanies are no longer willing to keep them open.Examples of overt subsidies include everything fromthe Romanian government’s years of subsidies, whichfinally had to be abandoned when the government ranout of money, to the current conditions in the formerEast Germany, the Chilean mines at Lota, and theBolivian government’s years of support of unprofitabletin mines.10 Examples of covert subsidies are even morenumerous.

Second, for multinational companies with reputationsto protect – or a desire not to alienate host-countrygovernments – it may no longer be possible simply to‘pull out’ of communities without making someprovision for the work force and the social, economic,and environmental dislocations associated with closure.Particularly where there has been little attention torehabilitation or stabilization of the mine site duringoperations, the environmental costs of closure alonemay tempt companies to stay in operation muchlonger than an analysis of current revenues versuscurrent costs might dictate.There is also always areluctance to close because it may be hard to reopen if prices improve tomorrow. Companies therefore mayinternally subsidize unprofitable mines.Third, banksmay be unwilling to force closure as long as they can envisage at least partial servicing of their loans.

And fourth, where miners have no alternativeemployment, they keep mining even when mines close– formally, as in the cooperatives of Bolivia, orinformally, even for minimum returns.They aretherefore subsidizing production with their unpaid oronly partly paid labour.

For a number of commodities, this combination ofnew low-cost producers and older, higher-costproducers lingering on under one form of subsidy oranother may be part of the explanation for what seemto be constantly falling prices.This important issueneeds additional research attention: if reluctance tobear the environmental, social, and other costs ofclosure and consequent overcapacity in the industry ispart of the reason for dismal world mineral prices,there could be few issues more important for everyonein the sector to understand.The question of ‘terminalcosts’ – what they are, who should pay them, and theirrole in a number of the industry’s current problems –is considered throughout this report.

The other commodity price issue is volatility. Since thecollapse of the Bretton Woods exchange rate system inthe 1970s, the prices for minerals have been morevolatile than those for manufactured goods.This cancause problems for mining companies, which find itmore difficult to commit themselves to a steadyprogramme of investment; for employees, whose futureis rendered insecure; and for governments, whosebudgets depend on taxation and rent from the mineralssector. Unpredictable prices also add to a general air ofuncertainty that can discourage investment and hamperlong-term economic growth.

That is the theory, anyway. Is it borne out in practice?The evidence is mixed.The World Bank says that thishas not been the experience of sub-Saharan Africa, anda 1995 study found no relationship between terms-of-trade volatility and economic growth.11 Other studies,however, suggest that uncertainty in commodity pricesmay indeed reduce economic growth – though theeffects can be offset by good public policy andjudicious use of foreign aid.

Although individual companies acting alone are oftenprice-takers, the industry acting collectively has someability to influence price through controlling levels ofproduction and stocks. However, governments can dolittle to influence unstable world commodity prices.Although a number of mineral-producing countrieshave in the past banded together with commodityagreements in attempts to stabilize world prices, theseefforts have had little success.

Volatility need not necessarily lead to instability if, forexample, governments smooth out the variations inincome using commodity loans, perhaps, or derivative-market hedges, though the consequences of potentiallypoorly supervised officials engaging in sophisticatedand risky commodities futures plays with publicmoneys need to be considered before there is a rush to such solutions.12 Another option is to establish amineral revenue stabilization fund.When prices arehigh, the government can accumulate reserves to drawon when prices are lower.13 In theory, such a fund – if insulated from political pressures – could stabilizeforeign-exchange expenditures or governmentspending and could help dampen the oscillation of realexchange rates. Chile, for instance, has establishedstabilization funds for copper and petroleum as a bufferagainst external price shocks.14 Botswana and PapuaNew Guinea (PNG) also have funds.Though the

Chilean fund appears to have functioned well, thecurrent evidence only relates to short-term effects.Much less is known and understood about mechanismsfor long-term stabilization – an area that requiresfurther research.Assuming that governments areconfident about their ability to cope with pricefluctuations, they should be able to extend thissteadying influence to producers, particularly small-and medium-sized ones, by guaranteeing a local floorprice for their output. Governments need to be verycareful when guaranteeing ‘floor prices’, however, asthis could lead to enormous public deficits if thegovernment makes the wrong call.The record fromother sectors is also not encouraging.

Governments can also plan for volatility on theexpenditure side.They would be less exposed, forexample, if they made conservative forecasts of futureincome and matched this with stable and predictablegrowth in public expenditures.Too often, for politicalreasons, forecasts are far too optimistic.Another option,which echoes the principle of a mineral stabilizationfund, is to separate mineral revenues from otherrevenues and release them for spending at a steady rate.15

Internal Economic StressesAnother difficulty for mineral economies is that abooming natural resource export sector can squeezeout other industries. In the Netherlands, for example,in the 1960s and 1970s a sudden increase in natural gasexports seemed to damage traditional export sectors,notably manufacturing and agriculture.What came tobe known as the ‘Dutch disease’ also appears

subsequently to have affected other primarycommodity producers in the 1970s and 1980s.16

The damage can be done in two main ways. First,buoyant resource industries can bid up the prices forlabour and other inputs.This harms traditional exportindustries – their costs increase but they are unable torecoup these by raising prices, since the latter are set byworld markets. (Other parts of the economy may notsuffer so much. Indeed, service industries may evenbenefit; not only can they offset cost increases bynational price increases, but they can also gather morebusiness by providing services to the expanding exportindustries.) Second, natural resource exports can alsodamage traditional exports through the exchange rate:if booming exports cause the currency to appreciate,this too renders other exports less competitive.

Some of these stresses are inevitable in economiesundergoing structural changes. Market economiesconstantly evolve as some sectors expand while otherscontract.And there need be no overall reduction ofeconomic growth if the gains from minerals exportsmore than offset the losses experienced elsewhere.Theeffects may be felt most where governments respond topolitical pressure and intervene to protect vulnerableindustries.This can lead to a general misallocation ofresources – including tariffs, quotas, or otherrestrictions that will render the country less open tointernational trade.And the damage can becompounded if the boom in mineral exports istemporary and the country is subsequently unable torestart traditional export industries.

Some economists argue that even successfully adjustingaway from manufacturing and towards minerals exportsis likely to be disadvantageous in the long term.This isbecause minerals production may take place in an‘economic enclave’ – with fewer linkages to the rest of the economy than normal manufacturing industries.In contrast to manufacturing, mining operationsnecessarily have a finite life span. It is also argued thatthe mining industry may be less likely to exchangepersonnel with other industries, as the skills gained inmining are less transferable.As a result, though mineralsproduction might create more profits in the shortterm, in the long term manufacturing can offer bettergrowth prospects.17 Nevertheless, much of this istheoretical speculation; the empirical evidence is farfrom conclusive. Correlation between low levels ofeconomic development and mineral wealth should not



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lead to an assumption of causality. On the issue ofbackward and forward linkages, for example, someminerals producers indeed work in enclaves, but othersmay be quite well integrated with the rest of theeconomy. On the skills issue, there is little evidence thatnatural-resource-dependent economies have lowerhuman capital accumulation than resource-poorcountries.18

Political EconomyThe third main reason put forward for the poorperformance of some mineral economies is that thedistortions caused by a sudden flow of mineral wealthcan erode the integrity of national institutions. Someof this takes place through corruption (as discussedlater in this chapter). But the arrival of mineral wealthcan also cause more general shifts in economic powerand influence that make the economy work lessefficiently.Thus a newly rich mineral elite may usepolitical and economic clout to fend off initiatives thatwork against its interests, such as using the tax revenuefrom mineral wealth to invest in human developmentor provide government support for export-orientedmanufacturing. It is important to realize that disputesover mineral wealth between the central governmentand provinces or local communities can also bedisputes over which ethnic group dominates politically.In the extreme, where there is poor governance and an inability to resolve these internal conflictseffectively, mineral revenues can be the spark that setsoff open conflict, and can then be used to buy thearms to fuel it.

Another possibility is that mineral earnings can propup inefficient governments. Some may use this moneyto repress dissent; others to buy off important interestgroups – all of which narrows the options for politicaland economic change. Of course, some resource-richstates are poorly managed – suffering from ill-definedproperty rights, mispricing of inputs and products, poorinvestment decisions, wasteful spending, and a generallack of accountability. But they are hardly unique inthis respect; many other countries have similar failings,and such outcomes are by no means inevitable.

Capturing Mineral Wealth

Clearly the existence of mineral deposits is no guaranteeof economic development.Whether deposits turn out

to be a blessing or a curse will largely depend ongovernments – on the quality of their institutions, ontheir capacity to manage these resources well and usethem to catalyse development, and on their interactionswith companies, civil society, and other actors.

How much should government attempt to controlmineral extraction? People in many developingcountries view a mineral endowment as a finite andexhaustible ‘national patrimony’ and regard it as theirduty to capture as much direct benefit or ‘economicrent’ as possible before reserves run out. In the 1960sand 1970s, some governments tried to maximize theirincomes through higher taxes and royalties and bylimiting the repatriation of profits.They also imposedvarious controls on what the corporations couldimport or export, and required that companies employa certain proportion of national staff.When this didnot yield the desired results, there were mandatoryjoint ventures with national companies, caps on thepercentage of foreign ownership, and ultimately either‘creeping nationalization’ through imposition of evermore burdensome requirements or even outright stateseizure, sometimes followed by attempts atcompensation.

By the 1980s, however, it was clear that some of thesemeasures were not bringing the desired results. Somestate mining companies, rather than contributing tothe national budget, became a drain, as subsidies wererequired to keep them afloat. Many governmentsacknowledged that state ownership and public-sectormanagement were failing to deliver anticipated socialand economic benefits, and that over-regulation wasdiscouraging investment.The 1980s also saw the onsetof economic liberalization generally and a greaterbelief that the best option was to allow the privatesector to take the lead in spearheading development.Encouraged by the World Bank and other institutions,many countries started to reform minerals sectorpolicies. (See Table 8–1.)

In their desire to attract investors, some governmentshave exempted mining companies from futureenvironmental regulation or have guaranteed fixedtaxes.The Argentine National Mining Agreement, forinstance, binds both the national government and theprovinces not to raise most taxes on the industry forup to 30 years. In some cases governments haveformalized these incentives through ‘stabilizationagreements’ – committing themselves not to impose



From Towards

Legal Reform

Access to Mineral Resources: Restrictive and hostile regimes to

foreign and private investment …

Limited access to mineral resources due to extensive state

holdings …

Security of Mining Title: Uncertain transition between exploration

and mining licenses …

A restrictive right to transfer exploration and mining licenses …

Environmental Responsibilities: Lack of concern about

environmental and social impacts …

Marketing and Foreign Exchange: High barriers to imports and

exports of mineral products and profit repatriation …

Institutional Reform

Ministry/Department of Mines: A role of the state as owner and

producer of mineral products …

Mining Cadastre Office: A discretionary and opaque mining title

registry largely serving the needs of state-owned companies…

Geological Survey Institution: A focus on detailed mineral

exploration …

Mining Environmental Office: Lack of institutional attention to the

environment …

State-Owned Enterprise: Creating losses stemming from economic

and technical inefficiencies and uncontrolled pollution of the

environment …

Institutional Capacity: Demoralized, underpaid, and under-trained

staff, unsupported by logistical resources …

Fiscal Reform

An input- and output-based taxation regime …

A taxation regime providing exemptions and holidays …

A mining taxation regime written into project-specific agreements

An investment environment without a clear growth strategy and

disconnected from international business practice …

An exclusive fiscal relation between mining company and central

government...

Source: Van der Veen (2000).

Table 8–1. Mining Sector Reforms Advocated by the World Bank

… an open sector with the same rules for all, grounded in the

Constitution and defined by statute.

… free access to land for mineral resources development based

on first come, first served principle.

… a guaranteed right for the mineral resource finder to obtain

mining license.

… free transferability without prior approval from the

government.

… clear, consistent, and realistic environmental protection and

social mitigation policies reflected in modern legislation and

standards.

… marketing and foreign exchange freedoms.

… a role as administrator/ regulator coordinating with other

government agencies to assure policy consistency.

...a transparent and efficient computerized licensing function with

public registry and realistic budgets.

…a focus on regional scientific and technical information with an

open access policy to disseminate the information widely at

nominal cost.

…the development of base-line environmental information,

sector-specific technical norms and guidelines.

…the restructuring and privatization of viable operations, the

orderly closure of uneconomic ones, and the application of

environmental regulations equally to all.

…invigorated staff, trained in sector specifics, with better

logistical support (even though still often underpaid).

…a regime based on profitability.

…a regime providing accounting rules adapted to the

characteristics of the industry.

…a mining taxation regime written into a tax and/or a mining

code.

…an investment climate that protects the interests of the country

while addressing investors’ and financiers’ concerns.

…an acknowledgment of interests and needs of local

communities to share in project benefits.



any new tax, royalty, environmental law, or any otherregulatory burden that did not exist at the time of theinvestment.

Over the past decade, more than 100 countries haveintroduced new regulatory regimes.These clearly havehad some effect: foreign direct investment (FDI) inmining has been growing at a respectable pace in recentdecades, albeit somewhat slower than FDI as a whole.19

Not everyone accepts that this is the right approach,however – warning that countries that relax controlsover mining are in danger of sacrificing social andenvironmental objectives. In the minerals sector, aselsewhere, there is the danger of countries competingwith each other in a ‘race to the bottom’ –jeopardizing the prospects for sustainable developmentand for maintaining intergenerational equity.20 Someargue that over time this approach works to the benefitof richer nations and the detriment of poorer ones.There is a clear need for a much more explicitunderstanding of where the boundary is betweengiving investors confidence that they will be fairlytreated and not subject to some sort of regulatoryconfiscation, and the potential surrender of sovereigntyby governments – a line that should not be crossed.

On the other hand, it is argued that standards indeveloping countries have actually been improving tobe more closely in line with industrial-countrystandards. Second, many mining companies point outthat it is not in their long-term interest to invest incountries with no or minimal social and environmentalstandards, since that increases political risk.

How, then, can governments maximize the benefitsfrom foreign investment while minimizing social andenvironmental costs? One of the most important waysis for them to develop a clear policy and regulatoryframework for the creation and management ofmineral wealth.This should be developed through thewidest possible participation, ensuring that policiesreflect the interests of all stakeholders.21 Governmentsshould in theory be able to enshrine such requirementsin legislation on environmental and social issues andon the plans and agreements reached by differentparties – demanding that companies engage in priorconsultation and also provide information in a clearand accessible form.They should also be able to helpnegotiate between mining companies and localcommunities. But there is clearly a long way to go: few

mining-sector structural reforms have establishedproper mechanisms to give local people a say in howmining activities are carried out or to enable them topartake of the benefits.

Governments should also take other steps to make themost of the gain from private-sector mining.They canstimulate investment by supporting their own mineralsindustry through, for example, the development of ageoscience database, appropriate training, and provisionof access to particular regions of the country wherethere is evidence of high mineral potential. In additionto providing companies with sufficient geologicalinformation to encourage exploration, governmentsshould aim for a non-distorting policy environmentand should set mineral and other policies that definethe conditions under which exploration, development,and mining occur – including land use andenvironmental rules.As an exploration permittingcondition, governments could require companies tosubmit their collected geoscience data into a publicdatabase.This will facilitate more investment and thegrowth of a home-grown prospecting and explorationcommunity.

One of the most basic issues is the division of the‘resource rents’ between the host country and foreigninvestors.22 Governments want to maximize theincome from a finite natural resource. Miningcompanies, on the other hand, often argue that reallythere is little rent to capture – that internationalcompetition and price pressures drive their margins solow that they can scarcely make a profit.

Many of the crucial decisions centre on taxation – asgovernments attempt to gain an adequate share of therents from mining without setting taxes so high thatthey scare off investors.23 Where does the threshold ofdeterrence lie? One study of more than 20 countriesconcluded that companies are unlikely to invest if thenet effective tax rate exceeds 60%.24 Somegovernments, particular where the reserves areexceptionally rich, take considerably more: thegovernment of Botswana, for one, is thought to retainup to 75% of the revenue from diamond mining.25

Such suggestions may give some indication of whatmight be desirable or feasible, but policy-makers willnot be able to fall back on a generally applicablemodel. Instead they will have to base their decisions onlocal circumstances and priorities. Each country has a

distinct view about the ownership of mineral rights,for example, as well as its own understanding of whatconstitutes fairness or equity.There are also differingviews about what constitutes a fair share of rentsbetween companies and governments.

Setting taxes high – using an intricate regime thatreflects the interests of many stakeholders and takes theenvironment into account – may seem like the bestway to maximize revenue, economic growth, andemployment. But if this discourages corporations frominvesting or tempts them to evade payment, it couldultimately deliver less than a simpler regime would.If there is one lesson to be learned from creative taxand concession legislation, it is that no matter how it isdisguised or characterized, the government ‘take’ is justthat – funds going to government – and that above acertain level this will ward off investors no matter howit is formulated.

Over the years, governments have developed a range ofmethods of taxing the minerals sector.The twoprincipal forms are corporate taxes and royaltypayments. Developing countries as a whole derivearound 80% of their mineral revenues from taxes oncorporate profits.26 This approach has the advantage ofallowing the government to reap the benefits fromprofitable projects, but it also exposes the governmentto some of the risk, since no profits means no income.Although governments may choose to levy a standardcorporate tax across all sectors, many also specificallyset higher rates for minerals companies.

If the state owns the mineral rights to the land, thegovernment may choose to charge royalties ascompensation for the depletion of its assets – based oneither the quantity of minerals extracted or their value.It may require these payments as periodic instalments,it may sell or auction the mineral rights at the outset,or it may use a complex combination of thesemethods. Governments may prefer royalties, as theseprovide a rapid flow of revenue, but they can lose outin the longer term if royalties discourage companiesfrom developing marginal resources or cause them toclose mines early. Foreign mining companies, on theother hand, prefer to avoid royalty payments because ofthe effect on their taxes in their home countries – fortax purposes, royalties are a deductible rather than acreditable item.27 Governments, too, seem to beturning against royalties: over the past century theyhave been moving towards profits-based taxes: Chile,

Peru, and Zimbabwe, for example, do not chargeroyalties.28

Although corporate taxes and royalties offer the maintaxation routes, there are many others, such asminimum taxes (used in Mexico and Indonesia),additional profits taxes (Mexico and Ghana), capitalgains taxes (Indonesia), withholding taxes (Indonesiaand all of the Southern African DevelopmentCommunity), and import/export duties or taxes(Indonesia), as well fuel taxes (most countries). Mostcountries also levy payroll taxes and various types ofregistration fee and stamp duties, along with differenttypes of surface rentals, land use fees, and value-addedtaxes. Companies may also have to pay taxes locally, inthe form of property taxes on the mine, perhaps, or viaa surtax calculated as a proportion of the taxes paid tothe central government.29

Governments and corporations of course have manyother financial links. Some of the most controversialinvolve subsidies. In an effort to attract investment,many governments offer mining companies cheap orsubsidized use of land, water, and energy. Under the1872 US Mining Law, mineral claimants have access tofederal land for an annual holding fee of US$100 perclaim. If their application for title to mineral rights issubsequently approved, they pay US$2.50 or US$5 peracre, with no payments for minerals extracted beyondnormal corporate taxes, and end up as outright ownersof the land.Whether this is an appropriate policy is thecentre of an intense and ongoing debate in the US.For some, the government is underpricing mineralresources and creating a subsidy or a ‘perverseincentive’ that stimulates a higher-than-optimal level ofproduction, which in turn has a greater environmentalimpact.They propose a variety of royalties or otherpayments to insure that the government receives ahigher share of the presumed economic rent. Others,on the other hand, argue that the government’s total‘take’ from overall taxation of mining companies in theUS is not lower than the world norm, and that there is neither a subsidy nor a resultant overproduction.They also point out that the US environmentalregime, whatever its flaws, is more stringent than inmany other parts of the world.

Countries can increase the benefits they derive fromtheir mineral resources through capturing more of thevalue-added of mineral production.To some extent thiswill be governed by the principle of comparative





advantage. However, industrial-country governmentscould assist mineral economies to do more processingthemselves by reducing the tariffs imposed on theimport of manufactured goods. (See Box 8–1.)

Managing and Distributing Mineral Wealth

Governments that expand their mineral productionrapidly also have to cope with the effects in other partsof the economy. If they are not careful they may findthemselves suffering from some of the worst symptoms

of the ‘Dutch disease’ described earlier.The importantthing here is to make a realistic assessment of theprospects for minerals exploitation. If minerals havesignificant long-term prospects, the government maywell choose to make long-term adjustments to theeconomy on the assumption that workers will have tomove away from more traditional export industries.Nevertheless, they can also ease the pain of transitionfrom minerals extraction by using mineral revenuestemporarily to support the currency or to provideretraining for displaced workers.

Mineral-dependent states that want to progress to higher-value production could do so by carrying out more of the processing on their

own territory. But they soon run into obstacles embedded in the world trade regime.a (See Figures below.) Although industrial countries

are happy to import unprocessed minerals – such as aluminium, copper, lead, nickel, tin, and zinc – they take a very different attitude

towards manufactured goods. If the same metals have been transformed into electrical wiring, say, or pots and pans, in industrial

countries they may be subject to tariff and non-tariff barriers. In general, the more processed the goods are, the higher the tariff.

Trade Tariffs in the Value Chain of Internationally Traded Metals

Data represent the mean import tariff for the European Union, US, Canada, Japan and Australia.

Source: UN Conference on Trade and Development, Trade Analysis and Information System

aOxfam America (2001).

Box 8–1. Tariff Barriers Impeding Industrial Development in Minerals Countries

Tariff %Copper

0 1 2 3 4 5 6

0.3

0.5

3.2

3.0

0.0

Tariff %Zinc

0 1 2 3 4 5 6

0.8

1.1

2.8

2.4

0.0

Tariff %Aluminium

0 1 2 3 4 5 6

1.5

4.5

5.2

4.0

0.0

Tariff %Nickel

0 1 2 3 4 5 6

1.2

1.2

1.0

1.2

0.0

Copper ores andconcentrates

Unrefined copper: copper anodes for electrolytic refining

Refined copper: cathodes and sections of cathodes

Refined copper: wiremax. cross section > 6mm

Cooking or heating apparatus for domestic use

Aluminium reservoirs,tanks, vats

Aluminium tube orpipe fittings

Wire of aluminium: max. cross section > 7mm

Unwrought aluminium,not alloyed

Aluminium oresand concentrates

Cloth, grill, andnetting of nickel wire

Tubes and pipes ofnickel (not alloyed)

Nickel bars, rods, andprofiles (not alloyed)

Wire (unalloyed)

Nickel ores andconcentrates

Zinc bars, rods, profiles,and wires

Zinc tubes, pipes,and pipe fittings

Zinc alloys

Refined zinc not alloyed(weight > 99.9% zinc)

Zinc ores andconcentrates

The extent to which mining operations benefit localcommunities has changed over time. Miningemployment is in general falling in most of the world,even as output goes up. It is also becoming much morespecialized.There are today far fewer semi-skilled ‘pickand shovel’ jobs than there once were, and it is oftenhard for local people to fill most of the skilledpositions. In addition, it appears that a corporatestrategy based on ‘contracting out’ or outsourcingcombined with better transportation and a smallerwork force means that even food and other suchcommodities may be increasingly supplied by foreignor at least non-local vendors. If governments and otheractors want to ensure that local people gain more ofthe benefits from mining operations, they need to findways of offsetting these trends.

Distributing WealthOne of the most contentious issues is how to sharemining revenues between the central government andlocal governments and communities in mining areas.The amount of any additional revenues from mineraldevelopment to allocate to the local level as opposedto other national purposes is a political decision withinthe sphere of sovereign government. Few countrieswith mineral development have been able to resolvethis issue satisfactorily. Failure can have seriousconsequences for government and companies,potentially creating tension or even conflict with localcommunities.There can be no simple rule of thumb todeciding on the split of revenues. Much will dependon local circumstances: on the size of the surplus, forexample, as well as the level of development aroundthe mine and the needs of the local community versusthe rest of the country. Governments will also have toconsider local preferences: would people prefer directpayments for land use, say, or would they be happierwith higher government expenditure on services?

Governments have a number of different ways ofdistributing benefits locally.30 A key method is a moredeliberate sharing of fiscal revenues among differentlevels of government and other stakeholders. In Peru,for example, the mining law (the Canon Minero)provides that a fixed percentage of the revenuescollected from mining by the central government willbe paid to regional authorities. But because of ‘fiscalproblems’ the central government has for years delayedtransfers to local governments.31 This has become amajor and bitter political controversy.

Some mining-sector reform programmes haveincluded different types of fiscal reform, but thesefocused more on the type and level of taxation than onfiscal decentralization or revenue sharing. In Indonesia,the central government, which under the previousregime guarded the revenues closely at the centre, iscurrently embarking on a radical programme ofdecentralization that will pass many powers to theregions.32 In theory, this will enable the regions toretain 80% of the revenues from mining within theirboundaries.The whole process is still in a state of flux,however, and there are serious doubts about thetechnical capacity of local administrations to handlethese new responsibilities. In reality, few countries have provisions for revenue distribution beyond thenational level.

Some governments have been successful in distributingrevenues, but others have been less so. In part this is aquestion of capacity: many simply lack the personnelor the skills to do the job well. Communication is alsoa problem – poor information flows among variousgovernment departments and between central andlocal governments often result in ignorance or amisunderstanding of local needs. Inability to distributemining revenues effectively may also be a reflection of more general weaknesses in governance such ascorruption, poor accountability, lack of transparency,and a lack of democratic decision-making processes.In addition, there are political issues – includingconflicts that centre on racial and ethnic differences or on the differing agendas of central, regional, andlocal politicians.

A further complication for countries embarking oncertain policies is that those who depend on theInternational Monetary Fund (IMF) may findthemselves in conflict with it. Setting aside funds froma particular source of taxation and earmarking themfor a specific purpose is called ‘hypothecation’ – atechnique that runs counter to IMF policy on fiscalmanagement and budgeting.While the IMF does notoppose revenue-sharing in principle, a mining codethat provides for direct transfers of this kind mayviolate the host government’s prior agreement withthe IMF on structural adjustment loans. In theory, thiscould be avoided by letting local governmentsthemselves tax the mining companies. But this is evenriskier, since it would amount to a major shift inpower between the centre and the regions. In somecountries with unitary legal systems, local government





has little or no independent power of taxation, so thisstep would require fundamental constitutional change.And the IMF would probably like this even less, sincethe Fund discourages fiscal decentralization and itcould, among other things, result in an increase in totalpublic expenditure that could stoke inflation.

There are several other models to indicate howrevenues might be distributed to the local level bygovernment, companies, and other actors. (See Chapter9 for detailed discussion of this.) Particularly wherelocal administration is weak, one option is for themining companies themselves to take on some of thesedistribution functions. In PNG, for example, thegovernment established an Infrastructure Tax CreditScheme that lets the mine developer spend up to0.75% of the value of gross sales on approved projectsand have that amount considered as corporate taxalready paid.33 Most of the projects involve health andeducation activities, along with other services such aswater supplies, roads, and policing.When identifyingprojects, the companies have to consult with all levelsof government as well as with local communities.Although capitalizing on company skills in this waydoes speed up development investment in remoteareas, it may also reduce the opportunities forenhancing the skills of local governments.Any suchscheme should probably be transitional and involve asrapid a devolution as possible to local governanceinstitutions.A particular shortcoming of the PNGscheme is that although it was introduced because ofthe lack of government capacity, it does not allowdevelopers to get credits for capacity-building projects.

Life After MiningIn the longer term, many mineral-intensive economiesmust also plan for the time when minerals run out.Prudent governments will consider the best ways touse their earnings for productive investment.34 Broadlythere are two options.The first is to make investmentsthat will produce a measurable financial return.Thesecould include real estate or financial assets such asstocks and bonds.This is more likely in richercountries that have greater flexibility in how they usetheir funds and that can more easily postponegovernment spending.They are also likely to havelarger local markets that offer greater investmentopportunities – though they may also choose to investoverseas to spread their risk.The second option is toinvest in assets that produce less measurable returns.

This could involve physical infrastructure, for example,as well as human development in the form of skillsdevelopment and health and education services. Mostpoorer countries are likely to choose this approach.Companies and civil society groups can also play animportant role in these investments and in ensuringthat benefits are sustained at the local level. (SeeChapter 9.) In some cases processing plants areconstructed close to mines, and once the mine closesmany of these plants continue to operate using otherfeed sources.

In any case, it is extremely important to recognizeearly in project planning that there will be terminalcosts, what these will be, and how they will affect agovernment’s obligations.Terminal costs are numerous,diverse, and sometimes very large. Examples include:• a sudden increase in unemployment and other social

costs as a region is faced with relatively highunemployment;

• the need to pay to maintain roads,telecommunications, electrical supply, or otherinfrastructure, which was previously done by thecompany; and

• the need to treat water running off the site tomaintain adequate water quality downstream post-closure.

There needs to be some clear agreement on the role ofnational government, local government, companies,and perhaps other actors in assuming these costs. If thisissue is not explicitly raised and settled at the start of amining project, it will become difficult to deal withlater as profitability falls and the company starts to lookto its next opportunity. It could also lead to pressure toavoid the consequences by keeping an unprofitableoperation open.

The stronger the provision is for a transition to a post-mining economy, the less political pressure there willbe on government as well as companies to keepunprofitable mines open.This could lower the cost ofsubsidies to both of them. Since unprofitable minesmay be the ones most prone to skimp onenvironmental controls or worker safety, it could alsohave other benefits.

Effective planning is a key requirement if governmentsare determined to manage resources in order to fostersustainable development. Mining ministries should beworking with ministries of finance, planning,

environment, labour, and social affairs – all of whomcan play an important part in designing the types ofintervention that will maximize mining’s positiveimpact. Nowadays governments are also working moreclosely with non-governmental organizations (NGOs)and with mining companies – pooling their knowledgeand capitalizing on their different skills and experiences.At the MMSD Workshop on Managing MineralWealth, the need for participation of all stakeholders indecision-making concerning the wider distribution ofmineral wealth was identified, as was the need forclarification of the roles and responsibilities of differentactors.35 The mining code of PNG provides a usefulexample of a framework for decision-making based ona Development Forum process.

Coping with Resource DepletionBeyond considering the short- and medium-term useof resources, governments also have to consider theimplications of the depletion of limited resources.This has led some to propose modifications in the waythat governments account for the extractive industries’contribution to national income. Conventionalmeasures of economic activity, in particular GDP, makeno allowance for the depreciation of natural capital,whether in terms of exhaustion of minerals reserves orgeneral degradation of the environment. Resourceaccounting methods, on the other hand, take a morecomprehensive and realistic view by drawing upbalance sheets that take into account the depreciationof natural assets. Ultimately this could also result inwider use of a more accurate indicator of economicperformance – green net national product or ‘eco-domestic product’.36

These techniques help to highlight the scarcity ofresources, warn of excessive exploitation, and permit amore accurate assessment of the relative productivitiesof different economic sectors.37 A good example isBotswana’s Sustainable Budget Index (SBI), whichmainly focuses on recovering resource rents fromdiamond extraction.This index is the ratio ofgovernment expenditures, excluding those on healthand education, to the government’s ‘recurrent revenues’– those in excess of revenues drawn from diamondexploitation.The degree of sustainability of thegovernment’s current expenditure can be inferred fromthe SBI: a value of 1 or less indicates that governmentconsumption has been financed through sources otherthan diamond mining, and all the revenues from

minerals have been used for public investment.38

A weakness of resource accounting methods is thatthey may not adequately account for improvements intechnology that affect on the availability of mineralreserves. (See Chapter 4.)

Corruption

A major obstacle to equitable distribution of miningrevenues in some countries is corruption. Somecompanies in the minerals sector collude in a varietyof illicit activities, feeling obliged to – or choosing to –bribe officials as a way to obtain licences and permits;to acquire monopolistic power to thwart competitors;to get preferential access to prospects, assets, or credit;or to sway judicial decisions. Companies may makesuch payments in the interests of business efficiency,but ultimately such a system is wreaking enormousdamage – not only undermining a country’s socialfabric, but also distorting the government’s priorities,undermining overall efficiency, ultimately slowingdown economic growth, and possibly leading toinstability and conflict.39 Corruption also drains offrevenue that countries should be investing in humandevelopment. Indeed, there seems to be a strongpositive correlation between high levels of corruptionand low levels of human development.40

Every country suffers from corruption to some extent.The more mature democracies are constantly on theirguard: prominent politicians in the United Kingdom,Germany, and France have been investigated foraccepting payments from companies that were hopingfor preferential treatment. But poorer countries are themost vulnerable, since the opportunities – and needs –are greater and the systems of control often laxer.Many public officials in the poorest countries work forvery low wages, often taking other jobs to supplementtheir income. So they may be sorely tempted tosupplement their incomes by demanding or acceptingbribes.At the same time, bureaucratic and managementsystems may be weak. Many officials have wide powersof discretion, allowing them to work with little or nosupervision and to make decisions with hugeimplications for mining companies. Corrupt officialsalso know that there is little chance of being caught,and even less of being punished, since systems offinancial auditing are often weak or themselvescorrupt. In short, weak governance makes corruptionmore prevalent.





Mining and CorruptionThe most widely accepted indication of the extent ofcorruption internationally has been devised by aBerlin-based NGO,Transparency International (TI),which gathers the opinions of businesspeople,academics, and country analysts on the extent ofcorruption in 91 countries.The data are combined toproduce a Corruption Perceptions Index (CPI) withratings that range from 10 (highly clean) down to 0(highly corrupt). Corruption appears to be especiallyprevalent in countries that have the highest naturalresource endowments. Of 32 leading mineral-dependent countries included in the CPI, 23 score lessthan 5.41 It should be noted that many of the mostcorrupt are oil rather than mineral producers.

Why does the minerals sector appear to be correlatedwith high levels of corruption? In part, this simplyreflects the fact than many operations take place inpoor countries where the general likelihood ofcorruption is greater. But the minerals sector itself hasseveral characteristics that may be seen to furtherheighten the risk.42

• Large capital expenditures – Mining is highly capital-intensive. Once a company decides to go ahead, ithas to commit huge sums of money to developmines – often out of proportion to the overallwealth of the host countries.The sudden arrival offunds on this scale and the flows of royalties,taxation, and other payments present enormoustemptations for underpaid or unscrupulous officials,who may be operating under information regimesthat involve little transparency.

• Extensive regulation – Most governmentsunderstandably try to regulate the minerals sectorclosely, demanding that companies fulfil all kinds ofconditions and obtain many different permits andapproval. Governments know that miningoperations, particularly those on a scale sufficientlylarge to interest transnational companies, havewidespread impacts – economic, social, andenvironmental – while making heavy use of energyand transport infrastructure.They want therefore toexert a reasonable level of control. But if the peopleissuing the permits and certificates have wide powersof discretion, including that of delaying action, theyare potentially open to taking a bribe.

• Fixed locations – Mining companies can only workwhere there are minerals, so their work sites aredetermined by geological conditions. Other

enterprises faced with a difficult environment orwidespread corruption might choose to establishtheir factories or other businesses in more congeniallocations. Mining companies have less choice; whenthe stakes are high, officials can be in a strongposition to demand bribes.

The implications of corruption – and the damage itcauses – extend beyond decisions about paying bribes.Mining companies are also affected by corruptionelsewhere in government. If politicians or officials divertmining revenues into their own pockets or foreignbank accounts rather than using them to invest inhuman development, then local people can reasonablyconclude that mining brings them little benefit.

In this case, the companies may not be associated withthe problem but they always suffer the consequences.As guests, mining companies need not just officialpermission to work but also a less tangible but equallyvital ‘social licence’ to operate.They can only gain this– and regularly renew it – if their activities areevidently making a valuable economic and socialcontribution.When local people see the distribution ofrevenues to be unjust, they are likely to protest andeven evict their guests.

Corruption among local officials can also create agovernance vacuum that pulls the mining companiesinto taking on too many responsibilities.Whenadministration is weak and corrupt, especially inremote areas, mining companies can easily slip into therole of surrogate government.Although this may bringshort-term gains for local people, it can also store upproblems for the future: corrupt officials feel under

bens

even less pressure to deliver services if they know themining company will step in and make up for theirdeficiencies.This can leave a costly legacy forcompanies when the mine closes.

International Action Against CorruptionAware of the extent of corruption and the corrosivedamage it causes, many governments, businesses,NGOs, and international institutions have beenmaking deliberate attempts to address the problem.The IMF, for example, restricts its operations incountries where it believes that corruption ishampering economic performance.The World Bank,too, has been determined to distance itself fromcorruption and has introduced sanctions on firms andgovernments engaged in corrupt practices: firms thathave been guilty of offering bribes are banned fromfuture World Bank–financed procurement worldwide.

Individual governments are also determined to fightcorruption by domestic companies operating overseas.The United States was the first to take action –through the Foreign Corrupt Practices Act of 1977,which criminalized the bribing of foreign officials.43

But nearly 20 years passed until other countriesfollowed suit by signing international agreements.In 1996 the Organization of American States drew upthe Inter-American Convention on Corruption, whichwas signed by its 21 member countries.44 In 1997 theOrganisation for Economic Co-operation andDevelopment (OECD) produced the Convention onCombating Bribery of Foreign Public Officials inInternational Business Transactions.This has now beensigned by 34 countries – the 29 members of theOECD and 5 others. It came into force in February1999 and is essentially an attempt to cut off the‘supply’ of bribes to foreign officials, with each countrytaking responsibility for the activities of domesticcompanies and for what happens on its own territory.45

Companies have to maintain adequate accountingrecords and undergo external audits.Those foundguilty of bribing foreign officials will be suspendedfrom future public contract bids.The convention alsorequires governments not to allow corporations tocharge bribes as a tax-deductible expense.

While the OECD convention is a major step forward,a number of grey areas remain. One that causesparticular confusion is that it does not cover what arecalled ‘facilitation payments’ (also known as ‘grease

payments’ or ‘speed money’) – small sums given toofficials to encourage them to carry out their normalduties more efficiently or quickly. (The US law alsodoes not address such payments.) Home governmentsare thus putting mining companies in an anomalousposition – ethically and legally – by allowing them todo something abroad for which they would beprosecuted at home.

Fighting Corruption at HomeAlthough corruption is a global problem affectingmany sectors other than mining, and internationalresolve can help, lasting success is likely to be home-grown – through a combined effort involvinggovernments, companies, and many civil societygroups. Governments have the most important role toplay in steadily reducing the opportunities for corruption as well as stepping up enforcement.They should, for example, simplify cumbersomeeconomic and taxation regulations, demand that publicinstitutions work in a more transparent fashion, andensure that audit and procurement activities remainopen to public scrutiny.They should also aim to limitthe number of administrative decisions linked tomining and the number of people permitted to makethem. Some of these procedures can be enshrined inthe general tax codes or laid down in the mining code.These should establish the criteria on which decisionsare made as well as covering the granting and renewalof title, the treatment of subcontractors, andcompliance with international accounting standards.Enforcement of anti-corruption measures will alsorequire an independent and effective judiciary.

Companies, too, should be playing their part, as manyare already doing.A number of the major miningcompanies have independently drawn up codes ofconduct for their employees and agents. Compliancewith such codes is unfortunately sometimes anothermatter. Much depends on the moral leadership and thetone set by the company’s senior managers. Companiesalso need various kinds of in-house enforcementmechanisms.These can take the form of specialhotlines or channels through which employees canreport infringements directly to another part of thecompany – the legal department, perhaps, at a regionalor head office. (See Box 8–2.) One mining company iscurrently using ethics forms for employees to reportirregularities to the company’s Audit Committee, whichcan then discuss them in a closed session of the Board.46





But companies will stand a better chance of changingthe general business ethos if they work with othercompanies – and not just those in mining – throughlocal or national chambers of commerce or businessassociations.They could, for example, maintain a localdatabase that would allow them to share informationabout potentially corrupt individuals and organizations.At the TI/MMSD workshop on this issue (see Box8–3), all agreed that the key is finding a way to takejoint action.

A united stand on this issue will avoid victimization ofclean companies. In Indonesia, one mining company,though legally not required to do so, has voluntarilydisclosed the amounts of royalties and other paymentsbeing made to the government in Jakarta.This addedto public awareness but also revealed to regionaladministrations in mining areas just how little theywere getting – as well as encouraging other groups,including the military, to demand a share of the cake.

One way of avoiding this kind of response is for allcompanies to contribute to a voluntary internationalregister of payments by mining companies to all levelsof government.

The attack on corruption will also require greaterefforts from many parts of civil society. Corruptionthrives in the dark, so it is vital to demand thattransactions between governments and corporationstake place openly.Transparency International and itsnational chapters, along with other NGOs, communitygroups, and particularly the media, can help monitorthe activities of governments and corporations.Companies might instinctively prefer self-regulation,but they have a great deal to gain from externalauditing, because even when they try to be transparentand disclose their payments they may be distrusted.Atthe same time, they and NGOs can also work with themore scrupulous public officials to help create a moreopen atmosphere.

One of the difficulties, of course, is that in countrieswhere goverment is weak, civil society is also weak.(See Chapter 14.) This is a particularly acute problemin many African countries and in the more remoteparts of other countries such as Indonesia, where theremay be few effective civil society organizations. Inorder to address this, many international organizations,including those of the United Nations and the WorldBank as well as many NGOs, will need to step up theirefforts to strengthen both goverment and civil society.

An MMSD workshop organized in conjunction with

Transparency International identified ways of addressing

corruption issues affecting the mining and minerals sector.

These included:

• training at all levels in companies on how to cope with

corruption issues,

• company codes of conducts designed to be relevant in the

global context and the local context,

• partnerships and cooperation between companies and other

stakeholders to share information and monitoring and to

promote reforms aimed at reducing discretion and other

incentives for corruption, and

• international mechanisms for monitoring and comparing

incidents of corruption.

Source: MMSD (2001b).

Box 8–3. Workshop on Corruption Issues in the Mining and

Minerals Sector

After the 2001 merger of the Australian and South African mining

companies BHP and Billiton, the company’s Global Helpline,

originally established in 1998, was enhanced by introducing a

regional capability to address significant issues. Previously,

employees could raise an issue from sites through to the

corporate Melbourne-based Helpline, the Ethics Panel, and the

Board. The new regional capacity will accommodate three

different time zones and reflects the greater concentration of

the work force in Southern Africa and South America and the

reduction in the Australian work force. The Helpline offers free-

call access in key global locations to provide support to

employees unable to resolve issues at the local level.

During 2000/01, BHP received 300 calls from employees seeking

guidance and support on work- or business-related ethical

issues. Those mentioned most often included practical

implementation of the company’s Charter and Policy positions;

information systems, including email and internet usage; and

equality in employment, with a number of potentially wrongful

dismissals and issues around harassment of employees. Other

significant issues included clarification of travel, entertainment,

and gifts policies; conflicts of interest; and use of company

resources and fraud. Although a relatively small number of calls

were received in relation to legal compliance, all issues were

tracked and potential breaches or conflicts averted.

Source: BHP Billiton.

Box 8–2. BHP Billiton’s Global Business Conduct Helpline

Protecting and Promoting Human Rights

Acting either independently or in collusion withgovernments, mining companies have been accused ofriding roughshod over local communities and respondto protests, particularly from indigenous groups, withbrutality and violence.To some extent this humanrights concern mirrors the issues raised in thepreceding section: mining companies can only workwhere there are minerals, and these may be located incountries and regions where governments haveregularly abused the human rights of their owncitizens.This leads to charges of complicity, or at timesdirect or indirect responsibility, since companies havebeen willing to work with repressive regimes or incountries with weak governance and rule of law, suchas Suharto’s Indonesia, Zaire under Mobutu, orapartheid South Africa.At best, companies haveexpressed regret, but otherwise some have appeared tobe indifferent to the human rights abuses committedall around them, regarding these as beyond their area ofresponsibility.

Given the scale of the investment, the fixed nature ofthe operation, and the long time period before aninvestment is recovered, mining companies needpolitical stability. But what does that mean in thiscontext? A traditional school of thought held that,especially in poor countries, stability was bestguaranteed by dictatorship.The endless cabinetshuffling, repeated elections, or the coup-countercoupcycles seen in some countries were a great concern toinvestors.They felt much more comfortable – as didsome in international financial institutions – with thestable figure of a ‘President for Life’ such as GeneralSuharto. If the excesses of those regimes were at timesdistasteful, they were rationalized as a necessary step inthe development process, or corporate conscienceswere salved by occasional symbolic statements ofdisapproval.

A real issue may be whether there is a broad consensusamong the principal social groups that mining has aplace in the national development strategy. Chile isfavoured by investors, among other reasons, because itis very unlikely that the country will elect any kind ofgovernment that does not accord mining a central rolein Chile’s future. But in other less democraticcircumstances, does too much reliance on personalconnections with the ‘strong man’ delay the industry inthe task of reaching out to all elements in society?

Does it make hostility to mining a potent politicalissue for the opposition?

To some extent company attitudes have mirrored thoseof their home governments. Particularly at the heightof the cold war, many home countries were preparedto stomach human rights abuses by authoritarianregimes, provided these regime lined up on the‘correct’ side. But from the late 1980s, and especiallyfollowing the collapse of communism, there has been amarked shift in international attitudes. Now home-country governments see little advantage in supportingauthoritarian regimes – indeed they regard them as aliability, an obstacle to secure and stable trade andinvestment.

Multinational corporations also have much lessincentive to cooperate with authoritariangovernments. Not only will they get littleencouragement from their own governments, they willexpose themselves to global scrutiny by the media andinternational NGOs.A number of high-profilecompanies have been targeted for their activities inoverseas subsidiaries – for employing children, forexample, or paying desperately low wages.47 Miningcompanies may feel they are less exposed since theyproduce intermediate goods rather than consumergoods that are vulnerable to public boycotts. But thecase of Shell in Nigeria, for example (where thecompany was condemned for holding its silence while the government committed human rightsabuses), has demonstrated that civil society groups have become increasingly sophisticated in gatheringintelligence on human rights abuses.48 Through theinternet and interested media, their findings andrecommendations can define and highlight the issuesin powerful ways.

Formally, the only entities bound by the 1949Universal Declaration of Human Rights and the 1986Declaration on the Right to Development are states,since only they have signed the correspondingcovenants. Recent years, however, have seen a distinctshift in international attitudes towards human rightsabuses. One important change has been a less reverentattitude towards sovereignty. People have rightsregardless of their nationality and they should thus beable to call upon international protection.The UnitedNations, for example, is now taking a more proactiverole and is more likely to countenance intervention inthe most severe cases. Second, the task of protecting





human rights is increasingly considered to extendbeyond states, though this remains an issue of greatdebate.This is in part a perception of the relativeerosion of state power and resources as some cedemany more activities to the private sector andparticularly to transnational corporations. But withpower comes responsibility, and some will argue thatthe influence and reach of transnationals should alsorequire from them the responsibility not just to respectbut to promote human rights.A third change, which isgradually pervading many civil society groups, is theidea of rights-based development – the notion thatpeople should be able to claim health services, say, orschooling not as a gift from a government orcorporation but as a right.

This new atmosphere is presenting mining companieswith difficult and complex challenges. Some of themost contentious issues concern land rights, which is addressed in Chapter 7.This section focuses on some critical human rights criticisms of miningcompanies: that they collude with security forces,violate labour rights, and work with ‘pariah regimes’.

Security ForcesSome of the worst cases and allegations of humanrights abuses have occurred when companies haverelied on national security forces either to gain controlover land or to defend established premises. Mineraldeposits are often found in remote areas wherecompany representatives, government officials, andsecurity forces lack any grounding in local languageand traditions, have no guidance on how to deal withclaims to occupy land or continue traditionallivelihoods, or feel that with no checks and balances on their actions they can behave as they wish.Today,international attention has become more focused on human rights allegations.

A prominent example of violence related to securityforces in a mining area is the Grasberg gold andcopper mine.This is located in the Indonesianprovince of Papua (formerly Irian Jaya).TheGovernment of Indonesia owns the mine, while anaffiliate of the US company Freeport McMoRanCopper and Gold Inc. works the deposit. Mining inthis province was always likely to be risky, given thelong-running struggle for independence.The minearea has long been protected by Indonesian securityforces funded by the government – at times

numbering up to 1200. Over the life of the mine, it isalleged that as many as 200 people have been killed inthe area, almost all of them unarmed civilians, andthere is evidence of other widespread abuses, includingrape, disappearances of people, intimidation, and forcedresettlement.49 There is no evidence that the companyitself had any direct involvement, but the nature of the relationship between the company and the militaryhas suggested to some there is guilt by association orcomplicity.

Recently, Freeport has taken steps to promote humanrights. In February 2001 it introduced a revised social,employment, and human rights policy that sets theUniversal Declaration on Human Rights as thestandard for all company activities.All staff andemployees of the Security and CommunicationsRelations Department are now required to sign a letterof assurance that they have neither participated in norknow of any human rights violations connected withcompany operations.50

Bolivia, too, has witnessed mining companies andsecurity forces working in league.The use of securityforces against miners led to massacres in 1942, 1949,1965, and 1967.51 More recently, in 1996, a disputebetween an aggressive local management and radicaltraditional local miners escalated into hostage-taking,and a violent confrontation between workers and thesecurity forces that left 9 people dead and 32 injured.52

There are always risks when securing mines indisputed areas or in areas beset with conflicts.Andwhen there is a serious conflict and the military isbrought in, they will become part of the problem.Frequently the security personnel, whether employedby the government or the company, will be outsiders,with little sympathy for local customs and traditions.When security personnel misbehave, or behave heavy-handedly, this can provoke a violent communityresponse and further escalation of conflict.

Labour Rights and the Repression of Trade UnionsHistorically, some mining companies have had a poortrack record when it comes to respecting the rights ofworkers. Leaving aside the low pay and the appallingconditions under which miners were often obliged towork, employees were frequently subjected to violentabuse.53 It is encouraging to see how far labour-management relations have improved among the

leaders of the industry. But this improvement has notbeen uniform, and the problems that remain are oftenfound in countries with an authoritarian government.

The standards that companies should be expected touphold are enshrined in the various conventions of theInternational Labour Organization (ILO), whichestablish the right to free association and collectivebargaining. In authoritarian countries or those inconflict, however, these rights are frequently denied.The ILO standards are not even universally recognizedin the more advanced countries yet, and practicalobservance often lags behind legal adoption.

One of the most dangerous countries for trade unionsis Colombia, which usually accounts for some two-thirds of the deaths of trade union activists each year.In March 2001, two leaders of the mineworkers’ unionwere reportedly shot dead following negotiations withDrummond Coal Company.54 No arrests have beenmade to date.At times mineral companies operate intandem with state security forces to break strikes.When 3800 workers in a Colombian labour unionwent on strike in 1990 at Exxon’s El Cerrejón coalmine at Guajira, the President sent the army in tooccupy the mine and break the strike.55

In some countries, miners rights are also threatened bydifficult and dangerous working conditions.Accordingto official figures, the Chinese coal industry, forexample, sees around 10,000 deaths each year, althoughaccording to the International Confederation of Free Trade Unions the real figure is probably closer to 20,000, given that the authorities often hideoccupational accidents.56

In India, bonded labour remains a concern.TheGovernment of India ratified ILO Convention 29concerning forced labour in 1954 and passed theBonded Labour (Abolition) Act in 1976. Between1976 and 2001, however, more than 280,000 bondedlabourers were identified in 13 Indian states.57 Somewere involved in small-scale mines, particularly thoseworking construction minerals.The majority havebeen rehabilitated under a scheme sponsored by theCentral Government. Despite this effort, bondedlabour may be prevalent in a few states, including insmall-scale mines.58

‘Pariah’ StatesAlthough there are signs of improvement in thehuman rights situation in some countries, the samecannot be said in Myanmar (formerly Burma), whichis now widely considered one of the world’s pariah orfailing states.This country, where a military juntaprevented an elected government from taking office,offers some of the starkest human rights abuses.A recent World Bank assessment concluded that aquarter of all children between the ages of 10 and 14are working, and a UN Commission on HumanRights resolution deplored ‘the deterioration of thehuman rights situation…including extrajudicial, summaryor arbitrary executions, enforced disappearances, rape,torture, inhuman treatment, mass arrests, forced labour,forced relocation, and denial of freedom of assembly,association, expression and movement’.59

Myanmar has deposits of many minerals, includinggemstones, tin, copper, and nickel – though miningaccounts for only a small proportion of GDP. Life inthe jade mines is particularly harsh and dangerous.60

Miners, who may be forced labour, still lack basicequipment such as jackhammers, water pumps, andconveyor belts.They also light fuses with cigarettes, andpry the jade out of the ground with their bare hands.There is no safety equipment. On average miners make50 trips up and down an open cast mine each day for awage of around US$1, one-third of which is spent onfood and water.A recent report suggests that thegovernment has taken control of most of the miningoperations that smuggle jade and gems into China andThailand.61 When the government took over the Yawomining area in 1998, human rights abuses werecommonplace, and according to the Karen NationalUnion, they included extrajudicial killings, torture bybeating, and looting and extortion.62

The international condemnation of the regime hasnow caused most major mining companies to leave thecountry.The US mining company Newmont pulledout following the US declaration of a ban on new USinvestments in the country.63 And most others havedeclared that they will stay away: Rio Tinto, forexample, announced in 1997 that it would not investthere because of the country’s human rights abuses.64

Nevertheless, at the beginning of 1999 there werethought to be nine foreign companies with majorinvestments in Myanmar.65 Some were from othercountries in the region, while others were ‘junior’companies from Australia and Canada.





One concern is that the companies with the greatestcommitment to human rights and the most reputationto protect pull out of pariah or failing states early,while foreign mining and other types of investmentcontinue in the form of less recognizable companieswhose provenance and ownership are difficult orimpossible to trace.This is analogous to the ‘driftnetters’ in the Pacific, who behind layers ofintermediary corporate vehicles continue practicesalmost universally condemned.

A Fresh Commitment to Human RightsOver the past 10 years the world has given greaterattention to human rights. States that tolerate humanrights abuses in or outside their boundaries areincreasingly considered internationally unacceptable.This has been reflected in the policies of the UN andother international agencies, and in 1999 the UNSecretary-General launched a Global Compact thatcalled on industry to ‘support and respect theprotection of international human rights within theirsphere of influence and to make sure that they are notcomplicit in human rights abuses’.66

National governments have also been using theirconvening power and diplomatic ‘good offices’ toestablish the norms they expect companies to follow.The Voluntary Principles on Security and HumanRights announced by the US and UK governments inDecember 2000 set forth guidelines on risk assessmentand relations with state security forces as well asprivate security providers for extractive sectorcompanies operating internationally.Two miningcompanies joined five oil companies, human rightsNGOs, and corporate responsibility groups indeveloping and welcoming the public launch of theprinciples. Since the launch, the companies involved inthe process have been working on implementing theprinciples in their operations.To this end, the twogovernments organized visits to Nigeria and Indonesiain late 2001/early 2002.The governments have alsobeen working on outreach towards other potentialparticipants.The Dutch government joined in late2001 and several other companies are consideringwhether to become involved in the process.67

These principles have helped clarify companyresponsibilities with respect to security forces as theyoperate in conflict zones and other regions beset byviolence and human rights abuses.Although the

principles were drafted collectively by majorcompanies, human rights NGOs, and corporateresponsibility groups (together with the US and UKgovernments), they have been criticized for not so farincluding governments, companies, and NGOs basedin the developing world.While the VoluntaryPrinciples are gaining recognition as the emergingglobal standard on the specific issues they address, itremains to be determined how inclusive the processwill become and how effective over time the principlescan be in altering the conduct of companies and theirrelationships with security forces on the ground.

Many NGOs have been establishing standards theywould expect companies to follow, such as AmnestyInternational’s Human Rights Guidelines forCompanies and the Australian NGOs’ Principles forthe Conduct of Company Operations within theMinerals Industry.68

In this changing international atmosphere, companies toohave started to formalize their commitment to humanrights. Most realize that they can no longer ignore thesocial and political realities in the countries where theyoperate, or shelter behind the excuse of following‘local standards’ – especially when these are thestandards of remote areas of Indonesia, the DemocraticRepublic of Congo, or Colombia. In some cases themining companies, such as Rio Tinto and Freeport-McMoRan, have their own codes of conduct on rightsmatters or have tried to incorporate the principles ofthe Universal Declaration of Human Rights into theirbusiness principles and internal guidelines.69

But it is one thing to have guidelines and codes ofconduct and another to enforce them. Many regionalbusiness units of major mining companies seem toenjoy a high degree of autonomy, and it is unclear howsubject they are to guidance and decision-making atthe head office.This is not to say there are problems –rather, in the absence of evidence to the contrary,someone somewhere will assume the worst.And thereis always some concern that the most unpleasant tasks,which would bring the harshest criticism, are delegatedto local intermediaries under some form of ‘don’t ask,don’t tell’.As a result, some mining companies aredemanding that each year their employees signstatements about not violating human rights, thecontent of which is subject to independentverification.

The Impact of Conflict

The last decade has seen widespread civil violence in15 of the world’s 20 least developed nations, many ofwhich are home to some of the most commerciallydesirable and under-exploited mineral veins.70

According to a World Bank study, ‘countries whichhave a substantial share of their income (GDP) comingfrom the export of primary commodities aredramatically more at risk of conflict’, in particularduring periods of economic decline.71 For the mineralsector, conflict is becoming increasingly important,not least because important minerals are located inpolitically unstable areas of the world.

At the same time, mining itself can also serve as a focusfor conflict – particularly if the rewards are notequitably shared.Another aggravating factor is large-scale in-migration, which causes resentment among thecurrent residents. Mining companies themselves thushave a critical role to play in conflict prevention.Disruption can also occur when mines are closed andthousands of people suddenly find themselves out ofwork. (See Chapter 9.) Understanding and addressingthese issues is essential to the success of a miningoperation.

Conflict in and around mining operations usuallystems from poor governance. Operating often in areasfar from capital cities and media attention, governmentand company officials may have little understanding ofthe customs and traditions of those living around themines and lack the capacity to deal with a new andcomplex environment.These areas may also harboursecessionist movements, as happened in Aceh andPapua in Indonesia and in Bougainville in PNG. (SeeBox 8–4.) In short, even though mineral exploitationhas the potential to bring economic benefits that canlead to peaceful progress, it can also heighten existingtensions or provoke additional grievances.

Furthermore, mineral exploitation can provide a sourceof funds to sustain outbreaks of violence. In 1999, forexample, it was alleged that South African miningtycoon Billy Rautenbach was bankrolling the Kabilagovernment’s side in the civil war in the DemocraticRepublic of the Congo.The South Africangovernment accused Rautenbach of siphoning profitsfrom exploitation of Congolese cobalt and coppermining to reimburse the Mugabe government forZimbabwe’s involvement in the Congo war.72 And in



When the original mining leases and agreements for the

Panguna copper mine on Bougainville island were established in

1967, Papua New Guinea was an Australian colony. The leases

for mining, tailings disposal, and road access were negotiated

between the administration for the Territory and Bougainville

Copper Pty Ltd (BCP). Ownership and control of the land in

Bougainville is customary and is handed down through the

generations, while the administration ‘owns’ the mineral rights.

Resentment grew due to the lack of consultation over exploration

and mining plans and perceived inadequate consideration for the

landowners. This led to threats of secession in 1969, unless the

administration revised its laws on the selling and leasing of land.

During the following years, opposition to exploration continued

and in some instances the administration used force to obtain

access to land. Many Bougainvilleans believed that they should

be allowed to decide when and how development of their

province should proceed without interference from the

Australians or other Papua New Guineans. All these factors

contributed to the emergence of Bougainvillean nationalism.

In 1974 the secessionist movement reached a crisis point, with

fervent opposition to the newly formed national government and

mainland Papua New Guineans. In the same year the PNG

government formally approved and implemented the 1967 BCP

agreement with the ratification of the Mining (Bougainville

Copper Agreement) Act.

The distribution of cash benefits from the mine over the

following years heightened resentment to the national

government and the company. Over the 10 years from 1978

to 1987, the distribution was as follows: the PNG national

government (taxes, fees, and dividends), 63.0%; foreign

shareholders, 31.6%; the Bougainville provincial government

(taxes, dividends, and royalties), 4.8%; other PNG shareholders,

0.4%; and landowners (royalties), 0.2%. The landowners also

received compensation for a range of items including land

occupation, agricultural and natural resources, and social

inconvenience.

In 1989, the mine became the focal point of a rebellion and

secession movement led by the Bougainville Revolutionary

Army. Many possible causes for the rebellion were cited, with

the Panguna Copper Mine of central importance among them.

Some of the mine-related factors that contributed to the

rebellion include compensation and benefit-sharing issues, land

availability, and environmental impacts. The Panguna Mine

closed and has never reopened.

Source: AGA (1989).

Box 8–4. Land ownership Versus Mineral Rights



several other African countries – notably Angola, SierraLeone, and Liberia – the trade in diamonds hasfinanced the activities of various rebel movements.

In Angola, for instance, the rebel movement UNITA isthought to have earned US$3.7 billion in 1992–97from these ‘blood’ or ‘conflict diamonds’, which it usedto finance its continuing struggle against thegovernment. In 1998 the United Nations placed anembargo on ‘all diamonds from Angola that do notpass through official state channels’. Despite this,around US$1.2 million worth of diamonds continuesto be smuggled out of Angola every day.73 Not all nowcome from UNITA, which has lost much of its miningcapacity; nevertheless UNITA still accounts for around25% of the illegal diamonds leaving Angola.74

Diamonds have also financed armed struggles in SierraLeone.The rebel Revolutionary United Front maynow be disarming, but thanks to mining in the Konoarea they are continuing to stockpile their wealth.Sierra Leone does have a system of certification, butmany gems are never seen by official eyes, and corruptdealers continue to buy the diamonds.75 In response tothe problems relating to armed conflict, the KimberleyProcess is developing a global system for certificationof diamonds. (See Chapter 11.)

In other cases, armed conflict can deter rather thanencourage mining investment.A 2001 survey of themining industry looked at why companies over theprevious five years had refrained or withdrawn fromotherwise sound investments. Some 78% ofrespondents indicated that a key factor in the decisionwas political instability – and in particular, armedconflict.76 This concern is understandable. Companiesknow that widespread violence disrupts markets,destroys infrastructure, threatens ownership rights, andbreaks supply chains.They also fear for the safety oftheir workers, who may be kidnapped or killed.And ifthey stay there, they expose themselves to accusationsof complicity in the violence or of fuelling or evencausing civil war, and subsequently risk the wrath ofpopular protest, legal action, stock divestmentcampaigns, and consumer boycotts.

Countries that need funds from multinationalcorporations will only be able to attract them if theyhave achieved some degree of peace and stability. Butthey will need to be vigilant about avoiding futureconflicts – strengthening the quality of governance and

honouring commitments to distribute and sharemineral revenues fairly among the populations.Conflict prevention strategies can also benefit fromcooperation with the private sector, donor agencies,NGOs, and other institutions.

The Way Forward

Attracting InvestmentAs governments and international institutions continueto adopt legal and institutional changes designed toprovide a framework to encourage mineral investment,there is a need to focus on appropriate principles andboundaries for the process. Investors have a legitimateinterest in protection against arbitrary governmentaction, but governments should not contract awayessential elements of their sovereignty in a rush toattract investment.To do so will result in a downwardspiral of conditions and terms – to the long-termdetriment of all.To address these issues:• inter-governmental groups such as the World Mines

Ministers,Asia Pacific Economic Cooperation, andothers could work to develop statements of principleabout appropriate terms for concessions, stabilizationagreements, or legislative frameworks;

• the way to strike the right balance betweenattracting investment and the rights of affectedpeoples needs further investigation;

• UNDP, the UN Conference on Trade andDevelopment (UNCTAD), and other UnitedNations organizations need to provide further policyguidance and capacity building in this area; and

• all parties must encourage a clear public debate on adefinition of principles that balance fair protectionfor investors with a fair return to host governments,including calculations of all revenue and indirectpayments.

• Experience suggests that the best results occur whenall government departments are involved – theobjective should be to arrive at fair trade-offs withingovernments as well as between governments andinvesting parties.

Global MarketsTariff and non-tariff barriers currently discouragemineral-producing countries from developingdownstream linkages from their minerals industries.• Consistent with the principles behind the new trade

round, the major consuming countries should takeaction to lower barriers to free trade not just in rawmineral commodities but in more elaborated goodsmade from those minerals.

• In preparation for future trade negotiations, there is aneed for a much more comprehensive and rigorousstudy of tariff and non-tariff barriers that may hinderdeveloping countries from incorporating morevalue-added into the kinds of mineral-basedproducts they sell in world markets.

Managing and Distributing Mineral WealthA universal formula for the distribution of wealthwithin countries is clearly inappropriate.The choice offormula should be determined by each nationaccording to domestic priorities and political systems.However, central control of all mineral revenues isunlikely to be appropriate.A proportion of benefitsneeds to be distributed through local administrativestructures to enable them to take advantages of theopportunities presented by mineral development andto prepare for the transition to a post-mineraleconomy.

There tends to be a lack of capacity at different levelsto manage the challenge of mineral development,particularly in poor countries.To address thesechallenges:• International organizations like the World Bank,

UNDP, and UNCTAD should continue to promotestudy and discussion of wealth distribution issues,including the distribution of returns from miningindustry taxes and royalties, in their dialogues withgovernments, with a view to a better spread ofresources to lower levels of government and tocommunities.

• As some already are, companies should be sensitiveto the effects of their procurement policies andshould aim through them to build capacity in andaround the mines.

• As suggested at the MMSD Workshop on ManagingMineral Wealth, an international database of goodpractices at the national level could be maintained.

• Experience differs in the use of mineral stabilizationfunds to overcome the price cycles in the sector.Further research is needed into the use of such fundsto deal with the problem.

Governments should consider further:• developing long-term strategic plans for the

management of mineral wealth that includeappropriate levels and methods of capturing the rentfrom minerals and distributing revenue, the creationof various forms of capital, and planning for theeffects of mine closure at both local and macro level;and

• developing measures, including commodity loansand fiscal restraint, to prevent undue stress on publicfinance resulting from mineral price volatility.

Transparency in the Management of Mineral WealthTo enable free political debate about how mineralwealth is managed:• governments and companies should more widely

adopt the practice of open publication of the basicinformation about how much wealth is generated,the amounts of revenue received by all governmentdepartments, and how that money is spent;

• industry organizations should consider, possibly inpartnership with an international organization suchas the World Bank Group, taking the initiative toestablish an international and public register of allpayments by mining companies to governments atall levels; and

• NGO ‘watchdog’ organizations could bring pressureto ensure that open publication regarding mineralwealth is realized.

Combating CorruptionCorruption poses a serious threat to sustainabledevelopment, and international concerted action isneeded to combat it.The minerals sector shouldconsider more widespread adoption of the followingmeasures:• individual company codes of ethics, aimed at both

company employees and contractors, withrequirements for employee and contractor sign-offs,plus employee support mechanisms such as internalhelp lines to report irregularities;

• action by industry organizations working withorganizations such as Transparency International toestablish common industry-wide guidance;

• government adoption of national legislation to putthe OECD anti-corruption convention into effect(recognizing that the complex issue of ‘facilitationpayments’ is not yet covered) – there is no reason forthis convention to be confined to OECD members;and

• government collaboration with other sectors, NGOs,





and Chambers of Commerce to move as a block todisclose all payments at a national level.

Promoting and Protecting Human RightsGood practice in human rights need to spread.Initiatives suggested include:• company/industry-wide human rights guidelines

with employee sign-off and support mechanisms,and extension to all local contractors;

• corporate social reporting or disclosure on humanrights indicators;

• cooperation by industry bodies as the GlobalReporting Initiative develops mining-specificguidelines;

• company adherence to the Voluntary Principles onHuman Rights and Security;

• third-party monitoring and verification of companypractices concerning human rights;

• international organization and company lobbying ofgovernments to adhere to some form of humanrights code, including relevant ILO Conventions andglobal agreements between companies and unions;and

• more research on clearer human rights indicatorsand measures of compliance for governments,companies, and civil society.

Preventing Conflict Many companies continuously assess political risk so asto avoid conflict. Nevertheless, more needs to be doneto prevent mineral-related and other conflict. In theMMSD workshop on this issue, it was suggested thatcompanies should:• conduct detailed research prior to investment

decisions where there is a risk of conflict – if theconditions for maintaining human rights and otherrelevant policies do not exist or if avoiding conflictis difficult because of political conditions, investmentshould not follow;

• on the basis of the conflict impact assessment andinvolving relevant stakeholders, determine whatconflict prevention or social investment strategyshould be implemented;

• cooperate with conflict-prevention NGOs to buildcapacity in and around mine sites to prevent conflict;

• cooperate with others to support and provide inputto conflict prevention work more broadly in thecountry, including devising local economicdevelopment programmes and strengthening the

capacity of local businesses; and• support the study of and dissemination of

information about the Kimberly Process of diamondcertification as a potential model for use elsewherein the sector.

Companies, NGOs, and international organizationsshould continue researching the relationship betweenthe private sector and conflict and developingappropriate tools to manage this.

Endnotes

1 See the mining cluster studies in Buitelaar (2001).2 UNDP (2001).3 Ibid.4 See Lamont (2001).5 Eggert (2001).6 Ibid.7 Weber-Fahr et al. (2001) p.10.8 World Bank (2000a) pp.103-32.9 Eggert (2001).10 See, among others, USGS International Minerals Statistics andInformation website, at http://minerals.usgs.gov/minerals/pubs/country; Ministry of Economic Development of Bolivia website, athttp://desarrollo.gov.bo; Ministry of Economy, Mining and Energyof Chile website, at http://www.minecon.cl.11 See World Bank (2000a) pp.103-32; Sachs and Warner. (1995).12 Ibid.13 See, among others,Auty and Mikesell (1998); Mitchell et al.(1996).14 Tomic (2001).15 Daniel (1992).16 Eggert (2001).17 See, for example: Hirschman (1958); Seers (1959); Baldwin(1966).18 Sachs and Warner (1995).19 Ostensson (1997).20 Third World Network-Africa (2001), electronic source (forwardedemail).21 Loayza (2001).22 See Eggert (2001) for a detailed discussion of resource rents.23 Brewer (2001).24 Otto et al. (2000).25 There are considerable economic profits (or rents) to be gainedfrom diamond mining in Botswana due to the unique richness ofthe resources.There is therefore more rent to be captured.26 Cawood (2001).27 Sunley and Baunsgaard (2001).28 Cawood (2001).29 Otto et al. (2000).30 McPhail (2001).31 Pasco-Font (2001).32 MMSD (2001a).33 Marshall (2001).34 Hannesson (2001a).35 MMSD (2001a).36 Green net national product is long established but rarelycalculated or published due to a lack of consensus among nationalaccountants on how top measure the depreciation of differentforms of capital (that is, buildings, machinery, and natural capital).37 Hamilton and Lutz (1996).38 Lange (2000).39 Marshall (2001).40 Schloss (2000).41 See Transparency International website, http://www.transparency.org/.42 This discussion is drawn from Marshall (2001).43 Marshall (2001).

44 Organization of American States (1996).45 OECD (1997).46 MMSD Workshop on Human Rights, Berlin, 16 September2001.47 Handelsman (2001).48 Ibid.49 Ballard (2001).50 Freeport-McMoran Copper and Gold Inc, USA, personalcommunication. See also Freeport’s website at http://www.fcx.comfor information about the company’s human rights and other socialprogrammes.51 Handelsman (2001).52 Organization of American States, Inter-America Commission onHuman Rights (1997), cited in Handelsman (2001).53 See as an example Barron (1957).54 Handelsman (2001).55 Ibid.56 ICFTU (2001) p.98.57 Government of India (2001) p.93.58 Tata Energy Research Institute (2001).59 World Bank (1999); United Nations Commission on HumanRights (2001).60 This section is based on Müller (1997).61 Handelsman (2001).62 Karen National Union (1998).63 Moody (2000).64 Ibid.65 Ibid.66 Annan (1999).67 Government of United States of America - Department of State(2001).68 Amnesty International (2001);Australian Asia-Pacific MiningNetwork (1998).69 Ballard (2001).70 UNDP (2000) p.36;World Bank (2000b) p.170.71 Collier (2000) p.7.72 Powell (1999).73 Angola Peace Monitor (2001).74 Ibid.75 BBC News (2001).76 PricewaterhouseCoopers (2001).



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