Extractive Industries in Violent Contexts: A Conversation with Luke Danielson

By Cullen Hendrix for Denver Dialogues

The European Union will soon vote on minerals regulation aimed at addressing the problem of “conflict minerals”—minerals like tungsten, tin, tantalum, and gold, whose exploitation line the pockets of conflict actors and prolong violence—in the Democratic Republic of Congo. This legislation follows an earlier US law, Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, intended to do the same. In both instances, the legislation is intended to stem the flow of these minerals, many of which wind up in the smart phones and computers on which this blog post was developed, and the associated funds.

While the DRC example may be emblematic of the troubled relationship between extractives and armed conflict, it is by no means unique. The historical record is littered with examples of extractive firms—for-profit entities engaged in the development and exploitation of natural resources—operating in conflict zones: Royal Dutch Shell’s network of oil wells and pipelines in the Niger Delta, Rio Tinto’s copper mining activities on the island of Bougainville, and French uranium mining outfit Areva’s actions in Tuareg-dominated northern Niger are just three cases in which valuable natural resources and tensions between local populations and extractive firms have been central to conflict dynamics. Because their business models rely almost entirely on immovable assets, i.e., deposits of ore or gemstones, they tend to be some of the only large businesses that are not “scared off” by the outbreak of violence. In part because of the reputational fallout resulting from cases like these—Shell and Rio Tinto were shamed by Western and local NGOs alike for neglecting (or repressing) local activists—corporate actors are increasingly aware of the need to engage productively with local communities, and under certain circumstances, can contribute to efforts at conflict resolution and building sustainable peace.

I recently had a chance to sit down with one of Colorado’s foremost minds on issues of governance and accountability in the extractive sector, Luke Danielson. Danielson, a lawyer and part-time professor with decades of field experience in mining industries, is now the president of the Sustainable Development Strategies Group, a Gunnison-based firm that provides practical policy advice to developing country governments for dealing with extractive firms. SDSG is the only North American-based accredited validator for the Extractive Industries Transparency Initiative, a civil society-led governance initiative to promote transparency in dealings between extractive firms and host-country governments.

In particular, our discussion highlighted the importance of mechanisms—either emanating from formal governance structures or from private sector collaboration—for preventing race-to-the-bottom dynamics among competing firms. In mining, incentives to be the first to exploit a rich resource deposit are so great that firms cut corners, both socially and environmentally, to establish a presence on the ground quickly. The result can often be poor relations with local populations and grievances that, under some conditions, become manifest in violent conflict. The following reflects a few excerpts from that conversation:

Hendrix: With some exceptions, I think it’s safe to say the extractive sector does not have the best reputation when it comes to its involvement in conflict-prone regions, and there are many who view these natural resources as contributing directly to conflict and violence. This is part of the broader phenomenon of the resource curse, or the notion that mineral wealth may undermine sustainable development and prove corrosive to domestic political institutions. Do you believe that there is a resource curse, and if so, what can be done about it?

Danielson: I do think natural resources have been problematic. I don’t think there’s anything inherent to them, however. I do think injections of lots of money into countries with weak governance and institutions is kind of like putting high-pressure water into a leaky system of pipes: it’s going to spring leaks all over the place. Part of the problem is that as you inject all these additional resources into the system, you have to strengthen the system. In fact, you probably want to strengthen the system first. We have to find ways to strengthen the institutions before the problems start.

Having a bunch of oil, coal, or diamonds just in the ground isn’t itself a source of conflict. The issues really start with the process of finding out what’s there and who finds out what’s there, i.e., who does the exploration. We’re working in Mongolia right now—I’m not an advocate for the kind of government Mongolia used to have—but they did do one thing well: they trained lots of geologists and they saw assessing the country’s mineral resources as a job of government, so that government would be informed what’s out there and which it wanted to invite foreign companies in to develop. The private sector model is that private companies do the investigation, so the private companies know more about the resources than the government does.

Hendrix: These problems seem to be most acute with respect to the smaller firms that tend to dominate early exploration efforts. Most of them aren’t name brands—like Shell, for instance—that can be easily identified by Western consumers and shamed for their illicit activities.

Danielson: In the world of the junior companies that tend to be the first on the ground, and that sign the first contracts and do the exploration, there’s an acknowledgement that it’s better to do things right. But there’s also this idea that you should do things quickly. I’ve heard it said many times that if you find a good enough deposit and get the rights to it, all your sins are forgiven. The big companies talk a game about having standards for what they acquire, but if you are talking about a world-class copper deposit or a gold deposit, they will find some way to hold their nose and buy it, even if the original contract was procured by corruption.

Hendrix: Your organization has done a lot of work in post-conflict countries—Mozambique, Sierra Leone, etc. Can you talk about how the extractive sector can be a positive actor in promoting long-term peace in these contexts?

Danielson: You start by acknowledging that there is a fundamental alignment of interests. You’re not asking these companies to do something goofy like become church aid organizations. The most fundamental interest of mining companies is long-term political stability. You are talking about a form of investment that is not portable: you’re investing $500 million dollars in digging a giant hole in the ground. If you’re making running shoes and things go sour, you can probably throw the equipment on a ship and get a building in another country. If you put $300-$400 million into immobile plant and equipment, you’ve lost a colossal amount of money. And the time horizon for the company to recoup its investment is easily 15-20-25 years. So you are looking at an industry that has an enormous interest in political stability. There was a time in the industry when some sought that in the form of repressive, dictatorial governments: “We’ve got these wonderful allies, the Suhartos, in Indonesia.” The only problem was that when events changed, being really close pals with the Suharto family went from being a huge asset to a colossal liability. That experience was repeated all over the world. Now, most of these companies, for financial reasons if nothing else, have made the judgment that some form of democratic, open government is usually going to be more stable.

Hendrix: Are there specific things they can do to help promote democratic governance, with the understanding that external democracy promotion does not have the most sterling reputation? As major stakeholders in the economies of these countries that are coming out of violent spells, are there specific things they can do to promote the peace process?

Danielson: What you have to do is find ways of enabling and encouraging, rather than controlling. It’s particularly hard, for engineers especially, to get out of the controlling mode. One thing you can do is apply international standards to your own work, and help government agencies understand international standards. It sounds odd, and I know some might faint at this, but the environmental practices and human rights practices of these companies at their best—and the worst is still out there—have really upped the game for environmental and development ministries in developing countries. Many CEOs [of extractive firms] see it as an advantage: “We’ve operated in Canada, we’ve operated in Europe and other highly regulated markets. If we can ratchet up environmental protection in developing countries, we’ll have a business advantage over our national competitors.”

Hendrix: We talked earlier about the importance of international standards in promoting peace and good governance. Can you talk about the Extractive Industries Transparency Initiative and its role in post-conflict societies?

Danielson: First off, there are a bunch of these initiatives. I was fortunate enough to be in on the formative stages of a number of them. I’m not an EITI wonk, but our organization is the only accredited validator in North America. These kinds of things have certain strengths, though none of them control—there’s not world authority that can tell everyone what to do; there’s no global parliament. The private sector has considerable strengths:  lots of money and technical know-how. The government has lots of strengths, including the power to legislate and enforce laws. Civil society has terrific strengths, the biggest of which is their credibility: they are believed. Polls show that six percent of the population believe mining executives while 75% believe leaders of NGOs. If you take all those strengths and combine them into an institution like EITI, it can be far stronger and do far more than if these sectors are working individually. That’s the great strength.