Tom 24 2008 Zeszyt 4/2
JACEK ENGEL*, PAVOL RYBÁR*
Substitutability of capital and sustainable development in mining
Introduction
Development and status of mining as well as accessibility of the earth resources is, besides other points, related to the following factors: desired environmental conditions, development and status of population, maintenance of the sustainable development, advan- cement and realization of new technologies of all-important countries and coalitions on the world’s map. In order to follow its sustainable developmental strategy, the OECD Forum on Future recommended a direction that might effect long-term mutual interaction of tech- nology, economy, society status, and state governments [2]. This recommendation for mining development is expected to be mandatory.
The estimates of mining development require taking into account the limited amount of raw material available for processing. In the early 90s the Roman Association implemented a “limited growth“thesis namely from the point of the final quantities of resources. The association expressed its concern about high consumption which could possibly lead toward exhaustion of the resources, claiming gradual restrictions in its usage, and in this way its slow-down or shut down of the society development. This philosophy was represented by economists in 30s and 70s of XXth century. Maltus´ catastrophic vision from XVIIIth century was based on the notion of non-renewability of natural resources to secure human needs [3].
Traditional gauge of the available quantities of natural resources is expressed by the resources durability index, which stands for the rate of the overall amount of sources to the ones utilized within a year’s time. The index gives the number of the years for the possible further use of resources available, supposing the current economic and technological con-
* Technical University Kosice, Faculty BERG, Slovakia.
ditions remain sustainable. Although there have been discovered new sources, and new technologies are being created every year, this simple calculation of the resources durability index is used on the regular basis, and its change indicates the rising or falling development of the available amount of resources worldwide. Nevertheless, it is necessary to point out that so far the number of newly discovered unrenewable sources has regularly exceeded the number of already used earth resources [4].
1. Sustainable development in mining
Mining is seemingly in contradiction with the concept of sustainable development.
Sustainable development lies on the intertwining of social, economic and environmental systems, and on the ability to span the goals of sustainability, i.e. on the economic prosperity and environmental approach. Economic prosperity is the natural goal of the mining com- panies, but it has to be in compliance with environment that is protected and preserved for the next generations.
Public opinion, supported by environmentalists and by majority of the mass media, reveals that it is impossible to take into account sustainable mining due to its drawing away mineral resources, and thus having negative impact on the environment. Consequently, public perception of mining is simplified and viewed as:
— non-consistent with permanent sustainability (formerly extracted mineral is “gone“),
— negative (as the primary source of pollutants and environmental degradation),
— as a second-rated activity because it merely deals with primary supplies which eventually could be substituted either by restorable sources or by recycling.
In reality, sustainable development requires the kind of handling mineral resources that leads to extending the life expectancy of supplies in their deposits, and to sustaining capital (natural, social, human, economic and material). This is a perspective of exten- ding natural earth resources that can be considered the natural treasure (property) and inheritance.
Discussion on raw materials and sustainable development has resulted in the orientation towards substitution of depleted raw material supplies into different forms of capital – environmental protection, risk and prosperity distribution, and the affirmation that support of mining is positive throughout the whole project: from its opening, through extraction process, and, to the final shut-down of the mine [14].
In the contemporary theories regarding mining, there is great emphasis put on permanent sustainability. Traditional neoclassical approach toward sustainable development represents the handling of natural supplies as any other capital resource enabled to generate the property and supplement social and economic prosperity.
Ecological economists (the term borrowed from Williams and Mc Neill) view the natural resources as commodities that are difficult to be monetarized, and are being valued under the market dictate.
There are several basic points which separate neoclassicistic approach to mining supplies from sustainable development. The fundamental difference lies in their position toward intergenerational justice (fairness) and substitutability of capital.
2. Substitutability of capital
The idea of substitutability of capital was for the first time introduced by J.R. Hicks in the year 1932. His concept resulted from neoclassical approach on substitutability of raw material resources. According to him, if prices of sources go up, demand for them decreases and substitutes, whether created by man himself or Mother Nature, are becoming econo- mically feasible. Then unrenewable natural source can never be exhausted because it will be substituted by a different commodity in case the price of unrenewable source becomes an obstacle for its further consumption. This approach is well-known as the concept of poor substitutability.
Supporters of substitutability (ecological economists) like to stick to this strong doctrine.
Within the strong substitutability, various sorts of riches (capital) are considered sup- plementary to one another, and, in the contrary, they are not supposed to substitute one another, moreover, any kind of source depletion may lead to restrictions for society in general. So raw material resources are not limited by technologies, but by source themselves.
This statement did not come to conclusion that renewable sources should be left under ground; it says that there must be rules to follow so as the existing resources may be as well secured for the future [14].
Future development is viewed by both neoclassical and ecological economists as follows:
neoclassics prefer approach where successful market at the present time stimulates economic growth needed to increase technological process and innovations to enrich the next gene- rations. Neoclassical approach to mining unrestorable supplies defines optimal mining this is indicated by the highest NPV (Net present Value) of resources in the given time horizont. So the intensity of mining is set up in the way that percentage increase of the net value equals the investment return. Neoclassicists believe that a higher rate of profit is appropriate because no matter how small the available amount of material may be after several years of mining, there will apparently be better technologies producing higher amount of capital. By using this method, the neoclassicists declare that it is acceptable to drain supplies in the manner that creates gains for public as long as annuity made by mining is invested into the capital created by man, which produces values greater than earnings made through mining in the deposit field.
Ecological economists on the other hand believe that higher profitability rate causes injustice between generations, and so it is thus “unfair“. The ecological economist can reject the above mentioned approach as insufficiently encouraging for next generations. This discrepancy between the neoclassical and ecological economists creates a direction heading towards the idea of capital substitutability [1].
Value of the mining project, substitutability of capital
In our calculations in connection with substitutability of capital, we are suggesting to introduce two factors:
— Factor one – covering economic, environmental, and social aspects of mining business under the conditions of sustainable development.
— Factor two – covering the risks of mining entrepreneurship in the region.
Components of the first factor:
The first factor includes economic demands of the business company and along with it the elements of sustainable development.
The economic component is supposed to be in keeping with the concept of sustai- nability because it is hardly possible to meet environmental demands with inadequate profits from mining, or being able to secure job opportunities and further social requirements and benefits for inhabitants in the regions. Moreover, with no mineral supplies available, it is unthinkable to maintain the already achieved standard of living. So a mining company should be provided calculations based on the NPV (Net Present Value) business plan, investment returnability, etc. Let’s impose liabilities on the company (in case it is producing raw material with variable quality of the useful component and with the option of selective mining), in the manner that it is also supposed to mine blocks of minerals with such quality of the active component that is lower than the cut-off grade; so that, by mixing low-quality material with first-class one, the company will be able to produce economically and technologically process able product.
This is as well the guarantee of “layering “or multiplying supplies for further generations.
(Slower withdrawing of unrenewable resources).
On top of that, in comparison with contemporary established practice, there could exist a publicly available part of the Mining project called e.g. “Sustainable Development“. The part of the profit of the project (10–15 years long), would be offered to the local authorities, or to the NGO and environmental organizations, to finance activities related to sustainable development in the region. The options of using money made by the mining company for sustainable development could deal with e.g.:
— job creations,
— developing local infrastructure (roads, public transportation improvement, school buses...),
— environmental projects (water quality control, improvement of water quality, support of the environmental companies operating in the region, ...),
— improvement of the educational qualities among people (creation of a schooling center, enhancement of the education level of the Romany ethnic groups etc.),
— common activities of the environmental and mining expert organizations in the direction for public,
— other options.
Components of the second factor:
It is appropriate to include the under mentioned factors among the risks of the mining business activities:
Political instability of the region – inappropriate business environment:
wars, terrorist actions, urge to leave the territory, change in proprietary relations.
Risk of corruption – uncertain business environment.
Risk of democracy – standard business environment:
global and regional decrease /increase of economic productivity,
falling/rising demand for natural sources, risk in monetary area, risk of changes as a result of orientation changes of the ruling parties after the elections, which may cause change in the tax amounts, or changes of conditions for foreign investments.
Risk of using environmentally unfriendly technologies – standard or uncertain business environment depends on:
less harmful or harmless physical methods to process raw materials, damaging or dangerous chemical methods to process raw materials.
Risk of density of the population in object territory – standard or/and dubious business environment:
thinly populated area is more suitable for carrying out mining projects.
Risk of sensitivity of inhabitants to environment – standard or/and unsettled business environment.
Evaluation of the deposit is well-known process in the business environment. Decision making of the company about the investment into the sustainable development and the acceptation of its decision is up to negotiations of the mining organization with local authorities, environmental organizations and the NGO coping with the issues of environ- ment and social development before the beginning of the whole business. If the negotiations happen to be unsuccessful, further steps in conducting the ongoing business matters could come out utterly useless without a chance of investments´ gradual returnability.
Risk quantifications:
Quantification of the mining business risk is supposed to be based on the filing of the business location into the Spatial matrix A, defining the region from the point of its economic development. Filing the regions into particular sections of the matrix may become the subject of on the regular basis organized specialist forums of mining, economic, environmental, and other agents involved.
Original Spatial matrix image:
Position of elements ai,j in the matrix A represents respective world-wide economic agglomerations, eventually their integration into, for this purpose, created units.
Let’s assume the following matrix image A as the original starting point for our further reasonings:
A= æ
è çç
a a a a
a a
a a
11 12 13 14
21 24
51 54
...
. .
...
çç çç
ö
ø
÷÷
÷÷
÷÷
where the first column has the elements standing for the countries of the OECD countries. e.g.:
a11 the USA, Canada, Australia a21 countries of Western Europe a31 countries of Central Europe a41 other countries of the OECD
the second column is filled up with developing and developed countries, e.g.:
a21 quasi stable regimes: Chile, Argentina, Mexico, a22 unstable regimes: Columbia, Venezuela, Cuba, a32 Countries of South Africa with developed mining a42 Front Asia
a52 Central and Eastern Asia
the third column houses countries with highly developed specific economies, e.g.:
a31 Russia, Ukraine a32 China
a33 India, Indonesia,
a42 Kazakhstan and countries around the Kaspic Sea a52 Iraq, Iran
The fourth column listed countries that have not been included in the previous columns, e.g.:
The Balkans, Turkey, North Africa,...
Listing countries into positions aijmay require their updating e.g., every two years, while filing countries into particular columns in Spatial matrix A does not play a decisive role for the final budget of a mining project under conditions of sustainable development.
Significant values will be given to those elements of matrix in the posisitions i,j, (clear from ai,j) which will be specified for in here defined risks of the mining business activities.
Further step assigned for the mining business risk calculation is set as follows: for any element ai,jof Spatial matrix A, there will be quantified values specifying the risks below:
pi,j(political instability, ki,j(corruption), di,j (democracy), ti,j(technologies), hi,j(po- pulation density), ei,j(sensitivity of population to environment).
In that way the element ai,jwill be defined by vector pi.j, ki,j, di,j, ti,j, hi,j, ei,j.
Figures pi.j, ki,j, di,j, ti,j, hi,j, ei,j will vary for inappropriate, uncertain, and standard business environments. Their quantification should become the subject of regular gatherings of specialists in the area of sustainable mining development, and should be as well the subject of their consensus so as the final values of mining risks will be universally implemented.
Subsequently, the risk of mining business is expressed as percentage (point) risk esti- mation of mining in the given field.
Evaluation of the risk factor in the mining business:
The sum of the here defined risks of mining business for the corresponding element ai,j counts for:
pi j, ,ki j, ,di j, ,ti j, ,hi j, ,ei j,
å
E.g.: for the OECD countries (the first column of the A matrix)
stands for let’s say 10–50%
for the countries in the second column A matrix 40–150%
for the countries in the third column A matrix 40–250%
for the countries in the fourth column A matrix 40–250%
Example 1:
The value of the mining project for the Central Europe for the project lasting 10–15 years would stand for:
feasible value of the mining project for the Central Europe = NPV x (1+first factor + second factor),
with
the first factor = 0.05–0.1 the second factor = 0.3–0.5
The feasible value of the mining project in the Central Europe for the project lasting 10–15 years should vary between (1.35–1.6) x NPV.
Example 2:
The value of the mining project for developing and developed countries for the project lasting 10–15 years would stand for:
feasible value of the mining project for developing and developed countries = NPV x (1+first factor + second factor),
with
the first factor = 0.005–0.5 the second factor = 0.4–1.5
The feasible value of the mining project in the developed and developing country for the project lasting 10–15 years should vary between (1.405–3) x NPV.
Conclusion
Based on the result, the manager will decide whether he can “sustainable carry out his mining business“, whether he will exchange his capital for the sake of the region and for sustainable status of the environment in the given endangered environment. On the other hand, this approach should guarantee his mining enterprising, which, on the contrary, in the environment of densely populated region, might not succeed. Nevertheless, the region will be ensured long-term environmental, social and developmental projects, and common language of the mining business executive along with the environmentalist.
REFERENCES
[1] E n g e l J., 2008 – Trvalo udrate¾ný rozvoj baníctva v podmienkach Slovenskej republiky. (Sustainable development of mining in Slovak republic conditions). Habilitaèná práca, TU Košice.
[2] OECD, EXPO 2000/OECD Forum for the Future, 21st Century Technologies: Balancing.
[3] R y b á r P., 2002 – Predpokladaný stav baníctva v prvej polovici XXI. storoèia. (The anticipated state of mining in the first half of 21st century). Acta Montanisitca Slovaca, roèník 7, 3, p. 139–148.
[4] R y b á r P., S a s v á r i T., 1988 – Zem a zemské zdroje. (Earth and Earth resources). Štroffek, Košice, pp. 175.
[5] S h i e l d s D.J. et al., 2007 – Mineral policy in the era of Sustainable development. Historical context and future context. 3rd Int. Conf. SDIMI 2007, Milos Island, Greece, Book of Proceedings, p. 25–32.
ZASTÊPOWALNOŒÆ KAPITA£U I ZRÓWNOWA¯ONY ROZWÓJ W GÓRNICTWIE
S ³ o w a k l u c z o w e
Projekt górniczy, wskaŸnik trwa³oœci zasobów, zrównowa¿ony rozwój, zastêpowalnoœæ kapita³u [red.]
S t r e s z c z e n i e
Rozwój i status górnictwa, jak równie¿ dostêpnoœæ zasobów Ziemi, odnosz¹ siê miêdzy innymi do nastê- puj¹cych czynników: po¿¹dane warunki ochrony œrodowiska, rozwój i status ludnoœci, utrzymanie rozwoju zrównowa¿onego, postêpy i realizacja nowych technologii w najwa¿niejszych krajach i koalicjach na mapie œwiata. Aby postêpowaæ zgodnie ze strategi¹ zrównowa¿onego rozwoju, Forum Przysz³oœci OECD zaleci³o kierunek, który mo¿e mieæ wp³yw na d³ugofalowe interakcje technologii, ekonomii, statusu spo³ecznego i rz¹dów pañstw [2]. Zalecenie to wobec rozwoju górnictwa ma mieæ charakter obowi¹zuj¹cy.
SUBSTITUTABILITY OF CAPITAL AND SUSTAINABLE DEVELOPMENT IN MINING
K e y w o r d s
Mining project, resources durability index, sustainable development, substitutability of capital [red.]
A b s t r a c t
Development and status of mining as well as accessibility of the earth resources is, besides other points, related to the following factors: desired environmental conditions, development and status of population, maintenance of the sustainable development, advancement and realization of new technologies of all-important countries and coalitions on the world’s map. In order to follow its sustainable developmental strategy, the OECD Forum on Future recommended a direction that might effect long-term mutual interaction of technology, economy, society status, and state governments [2]. This recommendation for mining development is expected to be mandatory.
