Extractives: How sustainable is social investment?

07/07/2016

by Cindy Kroon and Julia Baxter

The extractives industry has faced a bumpy ride, and we’re looking at a long road to recovery. Cost-cutting, efficiency and productivity are all buzz words negatively impacting local communities. Through social spending cuts, community-related projects are often among the first to be shut down. The impact on a company’s ability to operate can be detrimental and spark protests over undelivered promises and loss of local jobs.

This, more so than before, pushes the question can social investment ever be truly sustainable? Can it ever withstand the storm of low prices and company cost-cutting? With natural resources being finite, how can extractive projects outlive the very thing they work on?

“Shared value” initiatives is one option. These align the business interests of extractives companies with community needs and priorities; an extractives company selling excess energy or water to communities, thereby contributing to community development, increases company revenues at the same time.

The development of local workforce and suppliers are also a vital component of this concept. Procuring locally lowers a company’s labour costs, while improving the general capacity, productivity, and competitiveness at a local level.

These initiatives are more sustainable in downturns as they provide financial gains to the company and an incentive to continue the investment. However, they can wrongfully imply that the company is responsible for providing public infrastructure, such as water and energy, further increasing the community’s dependence on the extractives project.

Consider now impact investing: investing in profitable community projects that, in addition to financial returns, also generate social, environmental, and/or economic returns. This approach merely requires an upfront investment by the company, after which returns can be used to pay back the investment, or be invested back into the local business or community. Even though this option is the most sustainable, because it is based on a for-profit model which is not dependent on the extractives project, it is least likely to address societal needs at an appropriate scale.

Partnership? In many developing countries, extractives companies operate alongside donor organisations, but meaningful collaboration is often lacking. Given their complementary expertise and resources it appears to be logical that when united, they can deliver much greater benefits to a host nation and its citizens. It’s not unknown that in many cases, a project’s capital expenditure dwarfs Overseas Development Assistance (ODA), but that companies lack the development expertise and independence to make effective social investments. The end goal for any social contributor is to ensure a prevailing social investment; working together is always going to better guarantee this outcome.

Nowadays there is no need to explain why thriving local communities not only benefit the economy and society at large, but are also in the interest of extractive companies. The main causes of community opposition against extractives projects include a lack of economic opportunity, and poor health and living conditions.

Extractive companies cannot be seen as having sole responsibility for the development of the area in which they operate. What is needed to quash this assumption is an integrated approach, in which companies, governments, and donor agencies join forces to drive a cohesive and aligned development strategy. An active and involved host-country government, serious about harnessing the extractive industries sector for development, is crucial in the quest for true sustainability.
When discussing the design of social investment and economic development projects, companies, governments, communities, and donors alike, should consider their sustainability, think ahead and plan for a downturn. Engaging in partnerships early on allows companies to maximise their impact, even though collaboration is often seen as difficult, impractical, time-consuming, and might require a shift in thinking on certain issues. If the starting objectives cannot be aligned but the end goal is the same, there is a partnership to be forged.

As always with such complex issues, there is no simple remedy and there is plenty of work to be done to move forward.