Mining compensation ignores major losses to local communities

The World Bank overestimate the profit of mining in developing countries, mainly because it underestimates the extraction costs. International standards on compensation for local communities does not take in to account all the value losses these communities suffer due to mining projects. These are two of the conclusions in a new thesis in Economics from Luleå University of Technology.

In the thesis, economic data from coal mining companies in Mozambique has been collected and compared with corresponding data from The World Bank.

“There is a huge difference between World Bank Data and data from the individual companies. Therefore, developing countries should invest more in local expertise on data collection, says José Ganhane, the author of the thesis.”

He emphasizes that reliable data lies in the interest of both the state and the mining company; the former wants to maximize its revenue as owners of the mine, the later as its managers. Reliable data is also in the interest of the local community since an underestimation of the environmental costs (reforestation, water cleaning etc) will impair its life quality.

Underestimates extraction costs

The unreliability of World Bank data has two major explanations: It underestimates the extraction costs in developing countries and it makes estimations, not based on individual mines, but on wide stretched regions, often covering several countries. Albeit the study was made on coal mines in Mozambique, the findings can be generalised to other developing countries and other types of mines, according to José Ganhane.

“The World Bank policy recommendations to countries is based on the data collected. My conclusion, thus, is that countries should take caution when following these recommendations. Developing countries could also gain considerably by investing in local technology and knowledge instead of relying on other countries.”

In accordance with international standards, mining companies are obligated to compensate local communities due to relocation and/or damages to the vicinity. In the thesis, José Ganhane makes a choice experiment to examine the willingness to pay for improved water supply and forest use currently degraded due to mining activities. 419 head of households in Moatize, Mozambique were identified and asked how much they would be willing to pay for different proposed improvements.

Among the choices were ways of supplying water: in water bottles, as piped water or in a well. There was a strong correlation between preferences and underlying factors such as gender, age, income and education. For example, only a fraction of the respondents preferred bottled water, mainly people working for the mining companies, whereas people living on cattle and/or food crops preferred piped water and wells.

“Policy makers must account better for the heterogeneity of the people. There are different needs, capacity and preferences in a community.“

Value pre-mining lifestyle

Another part of the thesis investigated 308 Mozambican households’ willingness to pay (measured in labour) to restore the landscape where they used to live before mining began there. The study showed they were willing to work in average nine days a month.

“This is a relatively high number which indicate that they valued the pre-mining lifestyle as better than their current one.”

The study also showed that, despite receiving monetary compensation for resettlement in accordance with international standards, they saw themselves as worse off than before the relocation. Among the reasons for feelings of deprivation were that the new site was not as suitable for agriculture, that the old river was polluted and there was no new river where they could fish, and that they were relocated further away from the highway and thus the marketplace. There are also non property values that are not accounted for.

José Ganhane think that some of his findings may be generalised to developed mining countries, such as Sweden. Whereas World Bank data is more reliable for developed countries, international standards for compensation are applicable there too. The international standards can be seen as a floor for compensation. National standards may rise that floor, but José Ganhane think it is likely that Swedish resettlers would report a lack of compensation for non-property values too.

“There’s a difference between ‘house’ and ‘home’. These and other external costs must be accounted for, they must be internalised. To sum it up, to be fair the international standards for compensation must be improved.”