Getting it right: Preventing Conflicts in Company-Community Relations

By BYAMBAJAV Dalaibuyan

Conflict with host communities is a major business risk for mining companies in Mongolia. Though we can cite many specific issues causing local opposition to minerals exploration and mining projects, recent research suggests they all can be related to two dimensions of unfairness—procedural and distributional.

Procedural unfairness

Procedural unfairness—decision-making regarding any resource project made without inclusive and informed consultation— has instigated protest and conflicts in many places, especially in case of green-field projects. Environmental Impact Assessment (EIA) is a good example. Inadequate consultation during EIAs have resulted in uncertainty and opposition among local community members in the next phases of a project. In Mongolia, local, rural communities—may seem to fragmented and remote—have much higher public participation compared to urban citizens. For example, social surveys have shown that their attendance of community meetings is high.

Having better access to information and more lessons learned compared to the situation in ten years ago, local communities have now stronger concern about whether they will be better off as a result of the presence of resource development projects.

Another example is local level agreements (LLAs) between mining companies and local governments regarding collaboration, social responsibility and local development contribution. Recent research from Natural Resource Governance Institute shows that the content of agreements has attracted much attention in contrast to the adequacy of agreement-making process, including preparation, research, and public consultation. Despite good intentions of companies, LLAs can go wrong if procedural fairness is not ensured. One reason why the negotiation of Oyu Tolgoi`s Cooperation Agreement with Umnugovi aimag took 4 years was a challenge to develop and agree on governance mechanisms that can ensure procedural fairness in a long run (30 years!) and in the context of short-termism in local government (4-yearly elections!).

Distributional fairness

Distributional unfairness—asymmetric distribution of impacts and benefits of a resource project—does not usually cause immediate protests or opposition, but, if persists, it can have an adverse effect on the future of a project. A multi-partite agreement is one way to address this issue. An example is a new cooperation agreement between MoEnCo Company that runs Khushuut Coal Mine, Khovd aimag, and two soums. In the previous bilateral agreement with MonEnCo, Khovd aimag government took the responsibility to share benefits received through the agreement and, thus, coordinate relations of host soums with the company. That did not work well: benefits were not fairly shared and the company encountered community dissatisfaction. Now, Darvi and Tsetseg, the host soums, are a party to the agreement and, moreover, they should receive 30% of the fund.

In Mongolia and elsewhere, distributional unfairness cannot be managed or addressed by mining companies alone. Others such as government, civil society, and local authorities have their roles. The government has initiated schemes for providing fiscal advantages to mining regions in the distribution of mining revenues (royalties and licence fees), but they have been incomplete and inconsistent. The most recent scheme that the government approved in April 2015, promising to distribute 30% of royalty payments and 50% of licence fees accrued from non-mega projects, did not last a year. The government lowered the rate for transfer of royalties from 30% to 10% in response to Mongolia’s high risk of default on debt obligations in 2016, and in fact, implementation of the transfer was temporarily suspended in 2017. Surprisingly, local governments—except their frequent rejection of exploration license application—and mining companies have been silent on these reversals.

To have a consistent scheme and create certainty for local communities, concerted campaigns of local governments, mining companies and civil society are needed to facilitate informed, broad discussions about distributional fairness in mining revenue sharing.

Such discussions can also touch on the fairness of distribution of water fee. In September 2013, the government increased water use fee for the mining industry approximately 6 times (630%). The new rate had a significant impact on the amount of local budget revenue from water use fee—the right to collect it transferred from soum to aimag. While the Water Law states that the fee should be distributed for environmental purposes recent reports of the National Audit found many deviations. Importantly, soums and local project-affected areas seem to have no gains from water use fee. Companies and local communities can work together to fix this. For example, under an agreement, Oyu Tolgoi, Khanbogd soum and local herder representatives committed to collaborate on receiving a fair share of Oyu Tolgoi`s water use fee (12 billion MNT in 2015) from the aimag government to address the mine`s environmental impacts.

Business risks

Despite other factors, the reality is, however, that the cost of perception of unfairness and, thus conflicts, is higher for companies, just think of project delays, halt in production, reputational damage, government intervention, and a slump in share prices. Mining companies and professional associations need to seriously think about a number of critical questions: How should companies address local expectation about social investment if the distribution of benefits accrued from the mining industry is not fairly shared by government with local communities? How should companies improve community consultation in impact assessment? Leaving these questions to personnel in charge of community or government relations or to consultants alone is a common mistake among company executives. Some companies have lessons learned and take this issue seriously, strategizing at senior executive levels and integrating into corporate policy and operational procedures, and now it is time for others to follow.

This article was originally published in Asia Mining Magazine in February 2018.

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