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Leigh Clifford
Chief Executive, Rio Tinto Limited
Asia’s journey to a sustainable future
Dinner Address, 25 November 2002

I read the address given by Australia’s Treasurer to a recent Asia Society Annual Dinner. In it, Mr Costello emphasised the economic and strategic importance of Asia.

The Treasurer’s remarks raise an intriguing question: what would the world be like if Asia—the most populous and dynamic quadrant of the globe—did not make the transition to a sustainable lifestyle? There cannot be a sustainable future for the world if Asia does not make this transition. But I firmly believe that Asia will ultimately make the transition. The region has immense human talent—and a long history of concentrated, disciplined social endeavour.

So, from this background of basic optimism, I want to deal with the general questions posed by the challenge of sustainable development. Then, I want to pose three related fields for discussion.

The first discussion point is the role of mining in Asia today, following the decades of development in the 1980s. The second has to do with the contribution that mining can make to sustainable development, and why the mining industry globally is focusing locally more than nationally these days. The third is about the role of mining in realising sustainable development in Asia. You might ask, why the optimism? Well, I have seen the global mining industry become a champion for sustainable development. As well, I have seen Rio Tinto’s mines in Asia conduct their operations in ways that contribute to a more sustainable world. Finally, I know, as a result, that foreign direct investment in mining projects can showcase the principles of sustainable development.

I would like to start now by reflecting on the state of the mining industry in Asia. The springboard for Australian mining investment in Asia was in the Pacific: Papua New Guinea, Fiji, and some other islands. Many of these Pacific region projects brought enormous benefits, but they were often not sustainable benefits. This taught us a lot. One important lesson was that no company can operate sustainably in the absence of sound civic governance. And sound civic governance includes recognising the rights and aspirations of local people.

Following its experience in the Pacific region, the Australian mining industry reached out to Asia—this time as a destination for project investment, as distinct from the historically successful role as a trading partner. The same general lesson has again been learnt. A nation’s wish to profit from its resources cannot be at the expense of those most affected by resource development. Equally though, local people cannot expect to reap all the economic benefits of such development.

Many hopes for the region rested on the management of its resource developments. They still do. Indonesia, for instance, can hardly expect to regain its momentum without a strong flow of direct foreign investment. One reason Indonesia’s investment flows have faltered is concern over respect for property rights and agreements—respect for these things is essential to secure large, long-life direct investment. Without mining and resource development—and foreign investment—economic growth, sustainable or otherwise, will be difficult. I’ll return to these themes in more detail later.

Now, I want to explain why the global minerals industry has embraced the principles of sustainability.

The genesis was the Earth Summit, held in Rio de Janeiro in 1992. The industry sent observers, but was not heard. Those industry observers came away from Rio with a clear message: public concern over the environmental impact of economic growth was going to be increasingly expressed in terms of restrictions on global trade and industry. Industries that dealt in non-renewable resources would be a prime target for such restrictive legislation. And all this would be done under the banner of promoting a more sustainable global society. It is often said that there is nothing like the prospect of your own demise to focus the mind. The global minerals industry could refute the arguments of those who stereotyped mining as environmental vandalism undertaken for short-term economic gain.

However, the industry also recognised the genuine concerns that lay behind these attacks. In particular, it had no quarrel with the notion of intergenerational equity that lay at the heart of the idea of a sustainable economy.

It was obvious that the next conference, to be held in ten years time, would be crucial for our industry. As a result, the global resources sector undertook an unprecedented exercise in self-analysis. The Global Mining Initiative was a joint effort by most of the world’s large mining companies. The GMI was unique in that a world industry voluntarily allowed an outside agency to control the investigatory process and to write the report. Moreover, it was a process that sought the input of outsiders, among them some trenchant critics of the industry.

The 500-page report that emerged from that analysis was discussed earlier this year at a conference of all the stakeholders. As a result of both the analysis and of the subsequent discussions, the industry was able to present a cogent case at the 2002 World Summit on Sustainable Development held in Johannesburg.

What Johannesburg did was to remind us that you cannot have a sustainable world when islands of affluence are surrounded by a sea of poverty. In other words, economic growth is essential to meet the needs of both the less developed nations and of a burgeoning global population. The resource sector has a vital role to play in this economic growth. But that role is qualified by accountability to future generations.

Let us recall how we used to conceive of our role. In the post-war era, development economists suggested that large mineral projects could inject wealth into a developing nation. That wealth would fund public services and build much needed infrastructure. In addition, they assumed that successful mineral and energy developments would seed other economic activity and attract more investment.

About a generation ago, this simple economic model was questioned. People saw that the proceeds from resource developments were not always used to build health clinics or to fund schools. The anticipated upstream and downstream economic spin-offs were, sometimes, conspicuously absent. Or, where such benefits did occur, they tended to be experienced in a national or provincial capital city. The extent of local resentment on the part of communities who felt they had not benefited adequately was not appreciated. More broadly, people started to talk disparagingly of foreign investment in overseas mining operations, calling it enclave development. Some nations lacking natural resources, such as Japan and Singapore, were outstripping countries with a greater endowment of minerals and energy. Mineral wealth began to be seen as a dubious blessing.

A growing body of economic research appeared to support this view. In Europe, they talked of the Dutch disease; in Australia, we had the Gregory thesis. Irrespective of the origin, the basic argument was similar: Major mineral and energy developments can distort an economy—especially an immature economy—both socially and economically. Critics said that resource development could lead to a contraction in other economic sectors (notably manufacturing) by raising the exchange rate and fuelling inflation as capital and labour were drawn into the mining sector.

This argument still finds favour with those who feel uncomfortable with the idea of private enterprise and global trade. It gives an economic justification to those who fear the social and cultural impacts of foreign direct investment. The idea is that mineral development is not 'real' development—as though one billion dollars invested in a car factory is worth more that one billion dollars invested in a mine. In this view, the idea that mineral development could contribute to sustainable economic development is simply perverse.

The mistake that the industry made is, ironically, the same mistake its opponents have made. The model was too simple. Both sides have credited the industry with too much power. Different outcomes in different places are not explained wholly by corporate policies, but rather by the public policy settings of host countries. Good corporate governance certainly matters—but good civic governance is essential.

Established economic models do not always explain how mining can contribute to sustainable development. There are examples that prove resources to be a blessing; there are examples that prove the opposite.

Let us reflect now upon what I believe to be a very straightforward proposition about mining and sustainable development. For mining to be sustainable it must contribute to economic growth, but it must also accept responsibility for the inevitable environmental, social and cultural impacts.

Our experience tells us that minerals are essential to meeting people’s needs. But while the economic impacts of development are easily absorbed in a developed economy, they can have severe local repercussions in a less developed economy.

As miners, we now know that we cannot ignore the broader implications of what we do. We also know that it is foolish to attempt to deal with these implications on our own. For development to be sustainable, it must be a collaborative exercise. It must involve government, local people and, often, local, national or international NGOs.

There are costs to such an inclusive approach. But those costs are not great when you examine the price of not engaging broadly. The business case for sustainable mineral development is simple. In turbulent times, the best security for long-life mineral investments is public, particularly local, support.

Let me return to the specifics of my industry’s record in Asia and its potential contribution to sustainable development. In particular, I want to expand on what I said about severe local repercussions, because the differentiation of national and regional interactions is one of the keys to sustainable thinking. In the past, economists thought largely in terms of the national benefits conferred by a large resource development. They listed the various royalties, taxes, etcetera that would flow to government. Export earnings, employment, infrastructure—all were thought of in terms of their effect on the national interest.

One of the inherent problems of mining is that, while the benefits are widely disbursed, the physical and social impacts are largely local. This paradox exists in the developed world. But it is even more pronounced in a developing economy, such as those you find in Asia. There, history, religion and tradition may compound economic differences between the national centre and distant provinces. The decentralisation program that the Indonesian Parliament voted for in 1999 was an acknowledgment of this paradox. It was a courageous decision, but it has caused problems in the short-term, as legislatures and bureaucracies struggle to determine the limits of their respective powers. And there have been serious problems for resource companies whose investments were made under a more centralised regime.

Despite these problems, there is good reason to believe that an economic development model that builds from the local to the national is, in the long run, more sustainable than one that does the opposite. There is however one very important proviso: the sustainable model only works when every player is clear about the rules of the game in terms of risk and reward.

There is another way in which the sustainable development model has changed our thinking. In the past, commentators have tended to examine the size of the initial capital investment. The view has been that this measure would dictate the nature and extent of subsequent economic activity.

Those who have a sustainable development approach are equally interested in the use made of that capital over the life of the operation. What matters is that the capital is employed wisely—in the production of minerals and metals, and in the provision of social and economic benefits to those whose lives are affected by resource development.

An investment in a sustainable mining operation should give rise to a range of local economic activities that might endure when the mineral deposit is depleted. These activities may have some connection with mining, but they may not. In general, they will be measured in terms of the regional strengths and capabilities they have seeded in their wake. We want communities to understand that a mining operation will leave behind it more than just a hole in the ground. History shows us how mining can train and educate a generation.

This, then, is the approach taken by intelligent, socially responsible companies when contemplating investments. But, what about companies with well established operations? How do they make the switch to a sustainable mining approach, when they are designed to meet a very different set of expectations?
I suggest that the greatest facilitator of change is strong leadership. This will be expressed in clear corporate policies and translated into business systems and processes. And progress—or lack of it—will be regularly measured and made public.

Accordingly, any business professing to be socially responsible must be consistent in its approach to environmental and community issues. Corporate reputation depends on this; and that reputation is increasingly seen as an important asset. In today’s wired world, companies will be called on to explain both internal inconsistencies in behaviour and any apparent departure from global standards.

For a sovereign nation to allow a company to build a mine on its soil should be seen as an expression of confidence in the governance of that company. For a company to invest considerable sums is a very similar expression of trust in the institutions and intentions of the host nation. Both parties have much to gain—and much to lose. To ensure gains all round, each party must accept their roles in what is a two-way street. Each party should take on responsibility for fulfilling those roles. This applies to companies, governments, communities and NGOs.

Australian mining companies are taking part in a global move to put their operations on a sustainable basis by improving corporate governance in support of better performance. We know our role and we are taking responsibility. The results should include safer, cleaner operations that will contribute more effectively to the economic and social wellbeing of local communities. This may go well beyond the current benefits of employment, training, community development projects and the like.

Investors need to know that governments and their institutions are prepared to match these efforts by maintaining their own standards of responsibility. The trend these days is for partnerships. Partnerships with government, with civil organisations, with local land owners and with international organisations. It is a healthy development. It promises to maximise benefits and focus them on local communities. But such partnerships will only flourish when based on the assumption of obligations by all parties. Companies have rights they want to retain and they have corresponding obligations. This should apply equally to governments and NGOs.

It is not fair to expect companies to behave impeccably, while governments sidestep their obligations, disregard agreements or tolerate excesses. Neither is it right for NGOs to pretend that the standards of accountability, honesty and verification of information they demand of others do not apply to themselves.

These are times of uncertainty—all the more reason therefore to revisit some fundamental truths. The first of these is that the world has to shift to a more sustainable lifestyle. The second is that Asia will be an important proving ground for ways to make that shift, and a source of innovation for the rest of the world.

We all have a common interest in a prosperous Asia whose economy expresses the principles of sustainability. Our challenge, as miners, is to demonstrate ways in which that prosperity can be attained, while at the same time observing those principles. We cannot do it alone; but, with the aid of governments and NGOs, I am confident we will do it.