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The Valuation of Ecosystem Services in the Context of the new South African Mining and Biodiversity Guidelines: Implications for Theory and Practice

[Full Paper for Oral Presentation at the ALCRL 2014 International Conference – Sub-Theme 4]

Authors Joël Houdet (PhD) African Centre for Technology Studies (ACTS), Integrated Sustainability Services (ISS) & Synergiz Email. [email protected] and Claudious Chikozho (PhD) Gauteng City-Region Observatory, Wits University Email. [email protected]

October 2014

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Abstract Though the South African Mining and Biodiversity Guidelines were designed as a practical, user-friendly manual for integrating biodiversity considerations into the planning processes and managing biodiversity during the operational phases of a mine, from exploration through to closure, they do not specify exactly how ecosystem services can be assessed, especially with respect to economic valuation tools. The guidelines also do not indicate how the results of such assessments can be used in a meaningful way from the perspective of the mining sector and relevant stakeholders. Relying on lessons from several examples and case studies, this paper provides an overview of ecosystem services assessment approaches and tools that maybe deployed in this context. We pay special attention to making the links between nonmonetary qualitative and quantitative assessment tools that may be used to assess ecosystem status and or processes; economic valuation tools that can be used to derive information about costs and benefits to stakeholders; and environmental management accounting tools that may be used to manage costs and benefits for mining companies. Potential opportunities, risks, costs and savings are highlighted from the perspective of different stakeholders in terms of applying various principles within the context of mining operations’ life-cycle. Specific recommendations are made in the paper and further research needs are highlighted to make the proposed changes in environmental impact assessment, environmental management plan and closure practices financially-viable and attractive to project developers as well as socially acceptable to stakeholders. Key Words: Guidelines, Biodiversity, Ecosystem Services, impact assessments, valuation, tools, closure.

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Contents 1-

Introduction and methodology...................................................................................................... 4 1.1 Background to the study: The environmental legacy of the Mining Industry ........................... 4 1.2 Brief introduction to the 2013 Mining and Biodiversity Guidelines........................................... 4 1.3 Study Aims and Methodology ..................................................................................................... 7

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What role for ecosystem services valuation in the MBG? ............................................................ 8 2.1 What are ecosystem services? ..................................................................................................... 8 2.2 Why is valuation important? ....................................................................................................... 9 2.3 The valuation of ecosystem services – What are the main available approaches?................. 10 2.4 Ecosystem services valuation in the mining life-cycle – Can it be useful? ............................... 13

3- The valuation of ecosystem services in South African EIAs – Emerging practices and barriers to mainstreaming ..................................................................................................................................... 16 3.1 What are the options? ............................................................................................................... 16 3.2 The benefits and limitations of non-monetary ecosystem services assessments ................... 19 3.3 A critical analysis of a Cost-Benefit Analysis involving monetary ecosystem services values 25 4- Towards comprehensive Economic Impact Assessments to assess the net social, environmental and economic impacts of mining ventures ................................................................ 28 4.1 The standard approach to Economic Impact Assessments....................................................... 28 4.2 Towards a standardised model for assessing the net social and environmental impacts of mining in monetary terms?.............................................................................................................. 32 4.3 Embedding ecosystem services valuation in EMPs and closure assessment practices ........... 35 5-

Final remarks and key recommendations for policy makers, mining companies and EIPs ....... 36 References ........................................................................................................................................ 38

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Introduction and methodology

1.1 Background to the study: The environmental legacy of the Mining Industry For many decades, South Africa has been relying heavily on mining activities to generate wealth that translates into economic development, infrastructure and employment. In terms of environmental management and rehabilitation, mining companies have a history of only complying with the absolute minimum requirements (e.g. Van Zyl et al., 2012) and also following a reactive approach to conservation of biodiversity and ecosystems. At the same time, it is well-known that mining generally has substantial impacts on the latter. Already, it has unfortunately left South Africa with an enormous economic, social and environmental legacy (McCarthy, 2011; Ramontja et al., 2010; Swart, 2003). Prior to the enactment of the Minerals Act, 1991 (Act 50 of 1991), mining companies used irresponsible mining methods with no regards towards protecting the environment and had often shirked their responsibility towards environmental rehabilitation by leaving an area un-rehabilitated prior to them being liquidated or leaving the country. This negative legacy also relates to the long term residual effects on the social, health and environmental well-being of communities residing in the vicinity of these un-rehabilitated mining areas (Swart, 2003).

1.2 Brief introduction to the 2013 Mining and Biodiversity Guidelines The 2013 South African Mining and Biodiversity Guidelines (DEA et al., 2013) (“MBG”) were developed to partly address the environmental challenges facing the Mining Industry, with a focus on the conservation and sustainable use of biodiversity and ecosystem services. The 2013 MBG were developed as a tool which would facilitate the development of the country’s mineral resources in a way that enables regulators, industry and practitioners to 4

minimise the impact of mining on biodiversity and ecosystem services. The MBGs’ intended users are environmental assessment practitioners (EAPs) and mining houses when preparing environmental impact assessments (EIAs) and environmental management plans (EMPs), as required by law for all prospecting and mining applications. The MBGs were developed on 6 complimentary principles: i.

Apply the law;

ii.

Use the best available biodiversity information;

iii.

Engage stakeholders thoroughly;

iv.

Use best practice environmental impact assessment (EIA) to identify, assess and

evaluate impacts on biodiversity; v.

Apply the mitigation hierarchy (Figure 1) in planning any mining-related activities

(from impact avoidance to offset measures) and to develop robust environmental management programmes (EMP); vi.

Ensure effective implementation of the EMP, including adaptive management.

Figure 1: The Impact Mitigation Hierarchy (DEA et al., 2013) 5

In addition, the MBGs were designed as “a practical, user-friendly manual for integrating biodiversity considerations into the planning processes and managing biodiversity during the operational phases of a mine, from exploration through to closure” (DEA et al., 2013), explaining that a “range of tools and guidelines exist to support the application of these six principles”. It thus includes specific considerations with respect to each principle for each stage of the mining life cycle (Figure 2), including their implications for mining companies and decision makers.

Figure 2: The mining life-cycle (DEA et al., 2013)

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1.3 Study Aims and Methodology This paper aims to provide an analysis of how monetary ecosystem services values are used and could be used as part of the MBG. Though the MBGs seeks to“provide pointers to existing biodiversity information and tools and how they can be used to integrate biodiversity considerations at every stage of the mining lifecycle” (Shene-Verdoorn & Ncube, 2014), they do not go as far as providing specific guidelines about how to value ecosystem services, especially in monetary terms, and how to imbed the results meaningfully in each mining lifecycle phase. First, we analyse the potential role of ecosystem services valuation as part of the MBG, by providing an overview of existing ecosystem services classifications, discussing the importance of valuation, describing the main approaches to ecosystem services valuation, and exploring where ecosystem services values could be useful in the mining life-cycle. Through the analysis of several South African mining examples, we then discuss the pros and cons of potential approaches to embedding ecosystems services valuation in EIAs, assess emerging ecosystem services valuation practices as well as discuss the challenges ahead for full valuation mainstreaming. This allows us to make recommendations regarding the possibility of improving the MBGs towards making EIAs, EMPS and mine closure practices both financially-viable and socially acceptable to project developers and their stakeholders while areas for further research are also underlined. The paper is targeted at practitioners and scholars who grapple continuously with the challenges of effectively planning for better biodiversity conservation, with a focus on the mining – biodiversity nexus. We believe that a good understanding of ecosystem services values and their appropriate use(s) in various decision-making processes and applications can

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meaningfully help mining companies to improve their socio-economic and environmental performance and legacies.

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What role for ecosystem services valuation in the MBG?

2.1 What are ecosystem services? There are many definitions for the term “ecosystem services” (e.g. the most famous one is that of the Millennium Ecosystem Assessment, 2005), but many of the widely used definitions are not specific enough to result in consistent and explicit identification of ecosystem services1. “Ecosystem services have become an oft used construct with which to describe, in general and also in very specific terms, benefits provided by nature and valued by people” (Landers & Nahlik, 2013). In essence, ecosystem services provide the benefits that human beings and businesses derive from ecosystems – i.e. uses of natural capital. According to the Common International Classification of Ecosystem Services (CICES2; Haines-Young & Potschin, 2013) which has been developed over several years, ecosystem services can be classified into three categories: •

Provisioning services: generate beneficial goods, such as food and water.

•

Regulating services: generate tangible benefits derived from ecosystem processes,

such as flood, erosion and disease control. •

Cultural services: generate social benefits obtained from experiencing ecosystems,

such as recreation and spiritual values.

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Nahlik et al. 2012 provide an in-depth discussion of existing definitions, which is beyond the scope of this paper.

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URL: http://cices.eu/

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In parallel, a group of scientists at the United States Environmental Protection Agency (US EPA) Office of Research and Development (ORD) has recently adopted the concept of Final Ecosystem Goods and Services (FEGS) as a foundation for defining, classifying, and measuring ecosystem services (Landers & Nahlik, 2013). FEGS are defined as the “components of nature, directly enjoyed, consumed or used to yield human well-being” (Boyd & Banzhaf, 2007) and a draft list of FEGS is available in Landers & Nahlik (2013). Among the reasons proponents of the FEGS concept use for its mainstreaming are that: •

It avoids much of the ambiguity inherent in other ecosystem services definitions (i.e.

clear boundaries of what constitute or does not constitute a FEGS) ; •

It minimizes or avoids double-counting from the perspective of total economic

valuation of ecosystem services; •

FEGS are beneficiary-specific and may be understood by people without translation or

interpretation.

2.2 Why is valuation important? Though nature is priceless, some of its components can be worth a lot. People or companies are often not aware of the benefits they receive from ecosystem services. Mainstream gross domestic product calculations and corporate decision-making and accounting systems are silent regarding the value of ecosystem services, thereby giving the impression that reliable flows from well-functioning ecosystems have no value at all (Houdet et al., 2014a; TEEB, 2010). As Comello et al. (2014) points out, a continuing challenge is the inability of firms to comprehensively understand the connection between their actions and subsequent ecological impacts, coupled with an inability to consider firm-caused ecosystem impacts within existing decision-making and operational routines. 9

Because a lack of knowledge can lead to wrong decisions and even conflicts or catastrophes, a good understanding of ecosystem services and their benefits is a prerequisite for win-win-win situations for people, business and nature (TEEB, 2010). The valuation of ecosystem services generates information regarding the links between ecosystem services and the benefits economic agents derive from them and could potentially be used in various business decision-making processes and applications. Valuation is thus increasingly being developed as a vehicle to integrate ecological understanding and economic considerations to redress the traditional neglect of business dependencies and impacts on ecosystem services in both private and public policy, decision-making and operations (Waage, 2014; Natural Capital Coalition, 2014). Yet, for ecosystem services values to be used effectively in various business applications or decision-making processes, such values need to be framed or made available in the appropriate format. In doing so, businesses will be able to readily use them for strategic planning and investment decisions, internal management purposes (environmental management, supply chain management, budgeting and budget control), financial, sustainability and integrated reporting and disclosure, lobbying for the development of new market opportunities or informing ESG (Environmental, Social, Governance) risk assessment.

2.3 The valuation of ecosystem services – What are the main available approaches? Both qualitative and quantitative, non-monetary and monetary, valuation methods can be used to value ecosystem services and the resulting values applied at various stages of project planning and management, e.g. in problem framing, project design, risk analysis, investment decision making.

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On the one hand, Non-Monetary Valuation (NMV) methods (Figure 3) include quantitative and qualitative research techniques (i.e. surveys, interviews), participatory and deliberative tools (focus groups, citizens juries, participatory or rapid rural appraisal, as well as methods of expressing preferences in non-monetary but quantifiable terms (i.e. preference assessment, time use studies, Q-methodology) (Christie et al., 2012). Some studies also consider the spatial representation of ecosystem services through demand mapping and analytic tools rooted in biophysical approaches.

Figure 3: Subgroups of NMV techniques according to methodological similarities in data collection (Kelemen et al., 2014)

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On the other hand, Monetary Valuation (MV) methods include different methods which aim to put a monetary value on ecosystem services and hence reflect their importance for human welfare and wellbeing (Figure 4), the final choice of a method depending notably on the type and availability of data. The judicious application of economic valuation techniques to ecosystem services can provide valuable information for conceptualizing decision choices and evaluating management options (TEEB, 2010), though some limitations in the economic welfare approach to decision-making have been extensively discussed by academics (e.g. Farrell, 2007). It is also important to note that there are two main approaches to the MV approach. As argued by Levrel et al. (2012), the first one focuses on opportunity cost assessment, which is based on weak sustainability3 principles. The second approach involves assessing NC maintenance or restoration costs, which is grounded on strong sustainability4 principles. While the opportunity cost approach can be useful to identify the most important types of benefits and costs of various ecosystem services to society, the maintenance or restoration cost approach aims to assess the actual costs of achieving sustainable use and / or impact mitigation targets. Yet, which valuation approach is the most relevant for mining companies?

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Weak sustainability is the idea within environmental economics, which states that 'human capital' can be substituted by 'natural capital'. 4 Contrary to weak sustainability, strong sustainability assumes that "human capital" and "natural capital" are complementary, but not interchangeable.

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Figure 4: The Total value of Nature and the associated monetary valuation techniques (TEEB, 2010)

2.4 Ecosystem services valuation in the mining life-cycle – Can it be useful? The selection of an appropriate valuation method for a specific ecosystem services impact or dependency within any private or public decision-making process or activity requires making use of the fitness-for-purpose test: i.e. does (or can) the method(s) selected provide meaningful information to its targeted audience(s) for the intended purposes? It is therefore essential to emphasise that both non-monetary and monetary values are useful for decision-making and management purposes in the Mining Industry. Table 1 presents a schematic view of the mining life-cycle from the perspective of the impact mitigation

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hierarchy, highlighting the corresponding valuation approaches and key questions which should be asked by mining companies and their stakeholders. For instance, biophysical values about the supply and use of ecosystem services (e.g. water producing areas, wetlands, threatened habitat) is critical to ensure that a proposed mine avoids the most important areas. Such information is also critical to ensure that impact minimisation and rehabilitation measures are ecologically effective. With respect to monetary values of ecosystem services, while the opportunity cost approach is particularly relevant during the reconnaissance and prospective phases to identify important ecosystem services and their associated values for stakeholders, the maintenance - restoration cost is without doubt the most pertinent approach from the perspective of a mining company’s compliance with laws and regulations at the lowest possible cost. Moreover, ecosystem services valuation, whether non-monetary and monetary, can be useful for: •

The Environmental and Social Impact Assessment so as to: o Identify priority ecosystem services (e.g. no-go areas) and their associated values and benefits to affected stakeholders, o Make use residual impacts are minimised as much as possible, for instance avoiding areas with ecosystem services values which cannot be offset; o Plan for impact avoidance, minimisation, rehabilitation and offset measures (as part of the eventual Record of Decision would the project be approved under specific conditions).

•

The development of the Environmental Management Plan which effectively deals with

impact minimisation and rehabilitation measures so as to minimise ecosystem services loss, as well as (potentially) plan for effective offset measures for those values which can be offset. 14

•

The development and updating of the Closure and Life-after-mining Plan which can

ensure that rehabilitated areas supply relevant ecosystem services to the relevant stakeholders, especially surrounding communities.

Table 1: The mining life-cycle from the perspective of the Impact Mitigation Hierarchy, with associated main valuation approaches and key questions

Reconnaissance Application of the Impact Mitigation Hierarchy What is the main biophysical valuation approach for the mining company?

Prospecting

Mining

Avoidance measures

Ecosystem services risk mapping

Closure

Life-after-mining

Minimisation, Rehabilitation and offset rehabilitation and offset measures measures

Offset measures

Ecosystem services management mapping with associated impact mitigation measures

Identifying & securing ecosystem services equivalent to those which were lost due to mining

What is the main monetary Opportunity cost approach to assess residual impacts and Maintenance / restoration cost approach to minimise costs and liabilities towards valuation approach for the impact mitigation measures (in Record of Decision, Water compliance with laws and regulations Use Licence) mining company?

Key questions for the valuation of ecosystem services by the mining company

What are the ecosystem services in the receiving areas? Any critical one(s) used by stakeholders, especially HDSAs? What are the likely loss of ecosystem services and the associated costs to affected stakeholders due to the proposed mining project?

How can the loss of ecosystem services be minimised? Can habitats supplying ecosystem services be Which ecosystem services rehabilitated? can the rehabilitated areas offer to stakeholders? What Can ecosystem services loss be offset? If so, to what are the associated costs and benefits to the mining extent? company and its stakeholders? What are the costs and benefits of implementing the Is there a net loss of ecosystem services after closure? mitigation hierarchy for ecosystem services? How effective was the implementation of the mitigation What are the most cost-effective options to reach the hierarchy? targeted levels of ecosystem services, ideally towards nonet-loss or net positive impacts (if feasible) ?

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While the valuation of ecosystem services remains an emerging practice in the South African Mining Industry, we need to better understand which ecosystem services values (if any) are currently used by EIPs and mining houses and which ones aren’t. More specifically, we need to identify any methodological, economic and / or legal barriers to its mainstreaming. The following sections attempt to provide some possible answers to these questions.

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The valuation of ecosystem services in South African EIAs – Emerging practices and

barriers to mainstreaming

3.1 What are the options? There are several options for integrating ecosystem services valuation in EIA for mining projects: 1.

The undertaking of specific stand-alone assessments, making use of specific valuation

approaches as the consultant sees fit; 2.

The integration of ecosystem services valuation in all relevant specialist studies, such

as hydrology / water balance assessments, fauna and flora assessments, or social impacts assessments, making use of relevant valuation skills or expertise. 3.

The integration of ecosystem services valuation in a comprehensive and integrated

specialist economic impact assessments which would aim to assess the net economic impact of the proposed project. While the first two options have already emerged to some extent in South Africa, as attested by our discussions with EIPs and other field experts and desktop research (see case

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studies thereafter), we have found no attempt at undertaking option three within the scope of EIAs. Indeed, specific stand-alone ecosystems services specialist studies are increasing in numbers while some specialist studies (i.e. wetland, fauna and flora assessments at this stage) have started to integrate ecosystem services value assessments as part of their scope. Table 2 presents an analysis of the pros and cons of each approach in terms of Importance / visibility and usefulness for decision-making, data requirements, skills / capacity needs, costs as well as timing / planning aspects. In essence, though stand-alone ecosystems services specialist studies may make the most sense in the short term, the second option could be actively pursued so that all specialist studies imbed ecosystems services valuation as one of their outputs and hence produce values based on stronger biophysical data sets than stand-alone reports. On the other hand, undertaking comprehensive and integrated specialist economic impact assessments present a number of challenges to be discussed in more details in the next sections.

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Table 2: The pros and cons of the identified options for integration ecosystem services valuation into EIAs Specific stand-alone assessments Pros

Importance / visibility and usefulness for decision-making

Ecosystem services valuation is perceived as an important issue, worth an independent assessment

Cons

OPTIONS FOR INTEGRATING ECOSYSTEM SERVICES VALUATION IN MINING EIA Integration in all relevant Comprehensive & integrated specialist economic impact assessment specialist studies Pros Cons Pros Cons

Difficulties in making meaningful inter-linkages between different specialists studies

Ecosystem services valuation is seen as an important component of all specialist studies, whether on hydrology, fauna and flora or social impacts

Ecosystem services values may be not visible if specialist studies do not bring them to the forefront

Imbeds ecosystem services values Losses of ecosystem services, in in the assessment of the economic monetary values, may not be impacts, both positive and commensurate to typical economic negative, of the proposed mining benefits of mining projects, project; depending on the valuation Allows for the assessment of the method used (i.e. maintenance / net social, environmental and restoration cost approach may economic impact of the mine by tend to generate higher values putting a monetary value on based on a target of a no-net-loss ecosystem services dependencies than opportunity cost approaches); and impacts, as well as associated Monetary values cannot be the internal and externa costs and sole basis for decision-making. benefits. Biophysical data to be used for valuation may be lacking, due to the lack of allignment / cooperation with other specialists or the lack of appropriate database; Relevant economic data (e.g. only value transfer methods possible due to budget constraints) may also be lacking and affect the quality of the study; Social Accounting Matrixes are often used for Economic Impact Assessments and do not contain information about ecosystem services or externalities.

Some simple valuation methods are accessible (e.g. ecosystem services mapping and ranking)

Biophysical data to be used for valuation may be lacking, due to the lack of allignment / cooperation with other specialists or the lack of appropriate database; Relevant economic data (e.g. only value transfer methods possible due to budget constraints) may also be lacking and affect the quality of the study.

ToRs of specialist studies may be tailored to produce biophysical data tailored to direct ecosystem services valuation; Some simple valuation methods are accessible (e.g. ecosystem services mapping and ranking).

Relevant economic data (e.g. only value transfer methods possible due to budget constraints) may be lacking and affect the quality of the study

All required specialists (environmental / biophysical and economic expertise) are available in the market; Niche market development and entrepreneurship may be encouraged.

Biophysical specialists (e.g. wetlands, hydrology, fauna & flora) and economists need to work together; Work quality standards may be an issue; Mining houses and EIPs need to be aware of this for the drafting of ToRs and the selection of consultants.

All specialists would get a better understanding of the values of ecosystem services linked to their biophysical assessments

Would require additional capacity building / training for all specialists, the recruitment of economists by EIPs and / or a mix of both

Costs

Simple monetary valuation methods (value transfer) are available in certain contexts (i.e. relevant comparable data available) to minimise costs

Mining houses and EIPs need to cater for additional costs, which can be significant in certain circumstances

This may be part of continuing professional development to some extent

Additional training costs and / or hiring may be expansive

May save costs to society by provided a more complete picture of net benefits of the proposed mining project

Significantly increases in the scope and workload for consultants when comparted to that of standard economic impact assessments; Additional budgets would have to eb secured by project developpers.

Timing / planning

Can be undertaken at the same time as other specialist studies if all relevant data is available

May require data which can only be supplied by other specialist studies and, hence, result in delays

Undertaken within the timeframe of specialist study concerned

-

Can be undertaken at the same time as other specialist studies if all relevant data is available

May require data which can only be supplied by other specialist studies and, hence, result in delays

Likelihood to be used by EIPs and mining houses

Studies already available in the market, but essentially making use of quantitative non-monetary valuation methods; No requirement to undertake them by law limits uptake; IFC Performance Standards 6 is the key driver, used mainly for mining projects with international financing arrangements.

Data requirements

Skills / capacity needs

Some fauna and flora studies incorporate ecosystem services assessment components, for instance for that of wetlands; No requirement to undertake them by law limits uptake; IFC Performance Standards 6 is the key driver, used mainly for mining projects with international financing arrangements.

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Would promote integrated thinking Would take time and commitments and skills development by making to get people from different economists and natural scientists disciplines working together in an work together effective way

No study in South Africa identified by the authors; The additional skills, data requirements and costs involve significant transaction costs not likely to be willingly accepted by mining companies; All stakeholders would need to cooperate to fund the development of the supporting data infrastructure.

3.2 The benefits and limitations of non-monetary ecosystem services assessments Typical ecosystem services assessments currently carried out for EIAs for mining projects in South Africa involve the quantitative non-monetary scoring of different ecosystem services. For instance, Figure 5 depicts the results of a functional assessment of the wetlands on potential coal mine (draft Zonnebloem Coal Mine EIA - EMP, Mpumalanga, South Africa ; Wetland Consulting Services, 2013) using the “Wet-EcoServices” methodology (Kotze et al., 2009). This method provides a scoring system for establishing wetland ecosystem services. It enables one to make relative comparisons of systems based on a logical framework that measures the likelihood that a wetland is able to perform certain functions. Figure 5 further shows that the “Wet-EcoServices” methodology produces a clear visual understanding of the main ecosystem functions performed by the wetlands to be impacted by the proposed coal mine. It further allowed consultants to draw for pragmatic recommendations for wetland impact avoidance, minimisation and offset measures as part of the EMP; notably by helping define and quantify wetland offset requirements). In other words, this habitat-specific tool can provide meaningful information about the potential functions and services from wetlands and hence help improve decision-making as regards to the implementation of the impact mitigation hierarchy.

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Figure 5: Radial plots showing the results of the WET-EcoServices assessment for the two wetland types at the proposed Zonnebloem coal mine, Mpumalanga (Wetland Consulting Services, 2013)

Another example is that of the “ECO-FUTURES” Ecosystem Services Supply and Demand Assessment (EIA and EMP for the proposed Zonnebloem Opencast Coal Mine in Mpumalanga, South Africa; FutureWorks, 2013, 2013) which was used to: •

“Identify the ecosystem services which currently benefit local communities and

downstream users, as well as provincial and national users. •

Assess the dependence of beneficiaries or users on the supply of these ecosystem

services. •

Assess the current capability of the natural assets or land cover types within the

assessment boundary to produce these ecosystem services. •

Assess the changes in the supply of and demand for ecosystem services with: o the development of the Zonnebloem Coal Mine with various rehabilitation options;

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o the development of the Zonnebloem Coal Mine, Mafube Life Expansion Project (approved), and Rietvlei Mine (proposed) with various rehabilitation options. •

Assess, based on comparison of supply and demand, the risk to priority ecosystem

services with the development of the Zonnebloem Coal Mine. •

Identifying the key natural assets or land cover types occurring within the assessment

boundary.”

Figure 6: Range of services and service supply levels of each land cover type based on current condition and connectivity at the proposed Zonnebloem coal mine (FutureWorks, 2013)

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This was done by scoring the condition of the land cover types, identifying the priority ecosystem services supplied, scoring the capability of the land cover types to supply these services under pristine conditions and developing a number of future scenarios. Figure 6 shows the range of services and service supply levels of each land cover type for the study area while Box 1 shows the changes supply of ecosystem services in different scenarios in two ways, a radar diagram and a table with baseline scores and associated percentage changes. This is quite a comprehensive exercise as it involves all land-use types, though at a higher, less accurate level than the “Wet-EcoServices” methodology that is only applicable to 22

wetlands. Scoring by experts and key stakeholders, typically through focus groups, does constitute an interesting and useful way to express the value(s) of ecosystem services to different stakeholders and the associated risks due to land-use changes, under different scenarios, and this while avoiding undertaking time consuming and expansive quantitative biophysical data collection. Yet, both examples and associated methods also have limitations. They provide multicriteria results which may lead to conflicting results (e.g. it is difficult to compare scenarios) and fall short of providing relevant information for use in the Economic Impact Assessment of the proposed mining project: e.g. economic or monetary data regarding the current availability / supply of ecosystem services and the potential losses of the latter due to the proposed mine. This would constitute critical information for making an informed decision about the net benefits of the proposed mine. There are rare examples in South Africa where efforts have been made to quantify in monetary terms the loss of ecosystem services. The following section proposes a critical analysis of a case study.

Box 1: Changes in supply of ecosystem services in different scenarios at the proposed Zonnebloem coal mine, (a) in a table and (b) in a radar diagram (FutureWorks, 2013)

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3.3 A critical analysis of a Cost-Benefit Analysis involving monetary ecosystem services values

An Economic Impact Assessment5 for a coal mining project (NBC: Belfast Project) in Mpumalanga, South Africa was undertaken and included an “Ecosystem Services Analysis” for 378 ha of wetlands found within the proposed mining area which falls into the Nkomati catchment. The authors explained that the analysis did not fall within the brief given by the client but argued it should be taken into account because of “potential future liability”. What type of liability were the authors talking about? “Whilst there has been no opportunity to value the wetlands”, the authors have selected a number of relevant research papers to highlight the range of values which wetlands can supply (Table 3). These aimed “to illustrate: 1. The potential value of benefits enjoyed by broader society; 2. Which may have future liability implications for the agents degrading wetlands; and 3. Which may have social consequences; with 4. Implications for public and shareholder perceptions of corporate social responsibility”. In other words, the authors used an opportunity cost approach and, more specifically, benefit transfer techniques to assess the values of ecosystem services from the area (i.e. using values per ha from other studies), which is clearly the least expansive approach to do so. But is it appropriate, or at least sufficient, to satisfy the aforementioned four goals they have selected?

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It was terms a “Sustainable Development Investigation”.

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Table 3: Upper range wetland values from Costanza et al. (1997) (extract from Golder Associates 2009) Services Wetland values in USD / ha (1996 prices) Gas regulation 265 Disturbance regulation (including flood 7240 management) Water regulation 30 Water supply 7600 Waste treatment 1659 Refugia 439 Food production 47 Raw materials

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Recreation

491

Cultural

1761

Total value ’96 USD prices / ha

19 581

Total value ’96 ZAR prices / ha / year

142 941

Total hectares of affected wetlands

378

Total annual value (’96 price x Ha)

54 031 811

Total annual value of wetland services in 2009 prices (escalated based on RSA CPI)

123 735 844

On the one hand, it does give an indication of potential economic values of the affected wetlands (Table 3). The affected wetlands were thus estimated to potentially supply ecosystem services to the value of between ZAR 3M and ZAR 120M per year to onsite as well as downstream users. On the other hand, it fails to provide an idea of potential future liability implications due to wetland loss or degradation as no explanation is given to provide a clear link between specific ecosystem services values, any legal obligations or regulations and / or the potential loss of economic activity or livelihood onsite or for downstream users which may lead to litigation (and hence potential liabilities). Taking into account potential biodiversity or water offset requirements would have lead the authors to tell another story. How much could the replacement of lost wetlands potentially cost the project developer? How much land would need to be purchased, 26

managed and / or rehabilitated to reach no net loss of biodiversity or wetland functionality (i.e. water purification capacity)? Answering those questions would require using different economic valuation tools, namely replacement and restoration cost methods, and would be more time consuming. This point clearly questions the adequacy of the valuation model design. Thirdly, there is no assessment of the social consequences of the loss of the wetland ecosystem services, as no specific livelihood or social / business activity depending on wetland ecosystem services is discussed. Accordingly, it is difficult to assess whether the fourth objective has been reached, and the authors logically call for further in-depth studies. Besides, no assessment of the implications in terms of impact avoidance and mitigation costs and proposed social spending to support communities or stakeholders who would be affected is discussed. What’s more, the monetary values of wetland services are not integrated in the broader cost-benefit analysis undertaken by the team of consultants. While scenario 1 has a potential total production impact of R121.5 billion and a potential total GDP-R of R41.6 billion over a 100 year horizon (Golder Associates, 2009), R0.123 billion / year of lost wetland services over 100 years may seem relatively little (total of R12.3 billion, or just a bit more than 10% of the total production impact). But is this loss acceptable? The present case study unfortunately fails to prove (or disprove) whether this is the case. One can therefore argue that the information provided is insufficient to support fullyinformed decision-making. This calls into question the need for greater clarity on the type of Economic Impact Assessment required to assess the positive and negative social and environmental externalities of proposed mining projects.

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Towards comprehensive Economic Impact Assessments to assess the net social,

environmental and economic impacts of mining ventures

4.1 The standard approach to Economic Impact Assessments

An economic impact assessment of a proposed mining project is not mandatory in South Africa. In broad terms, specialist involvement is needed in EIA processes when the environment could be significantly affected by the proposed activity, where there is insufficient information to determine whether or not unavoidable impacts would be significant and/or where that environment is valued by or important to society. Economic Impact Assessments in mining typically deal with the evaluation of potential impacts of a particular project on the economic environment of the receiving area. It analyses potential changes in production output, Gross Value Added, and employment during all relevant lifecycle phases of the proposed mining project (i.e. construction, operations, closure, land-use after mining). More generally-speaking, Economic Impact Assessments aim to assess the way in which the direct benefits and costs of a proposed project affect the local, regional, or national economy. This is undertaken by means of a cost-benefit analysis (CBA). The intervention (e.g. mining project proposal) can be in the form of new investment in infrastructure, new development, adoption of a new policy or services, expansion of current operations, etc. The types of economic impacts can be:

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•

Positive and include the creation of additional jobs, generation of business sales and

value-added, improved quality of life, increase in disposable income, and growth of government revenue in the form of taxes and royalties. •

Negative, through the loss of forgone alternative livelihoods and business activities

(i.e. opportunity costs), such as changes in land-use from agriculture to mining or the loss of future tourism potential, as well as through negative social and environmental externalities. Assessment of economic impacts requires knowledge of expenditure on the construction of the mine and operating costs borne once mining commences. Conversion of these input data into economic impacts is done by using an econometric model. For the model to be considered valid, all the various assumptions must be adhered to and it is essential that the data required be as precise as possible, since the quality of the model’s output is directly related to the quality of the data inserted into the model. An intervention into an economy not only creates direct benefits to the investor, but has spill-over effects on the other economic agents. These spill-over effects could be positive or negative. Three types of economic impacts are generally assessed: •

Direct economic effects are generated when the new business (e.g. mining project)

creates new jobs and purchases goods and services to operate the new facility. Direct impact results in an increase in job creation, production, business sales, and household income. •

Indirect economic effects occur when the suppliers of goods and services to the new

businesses experience larger markets and potential to expand. Indirect impacts result in an increase in job creation, Gross Geographic Product (GGP), and household income. •

Induced economic effects represent further shifts in spending on food, clothing,

shelter and other consumer goods and services as a consequence of the change in workers

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and payroll of directly and indirectly affected businesses. This leads to further business growth or decline throughout the local economy. Economy-wide impacts refer to the sum of the direct, indirect and induced effects. Box 4.1 provides an illustration of a representative CBA for a proposed gold mine.

Box 4.1: Comparing mining and agriculture scenarios for a proposed gold mine (Integrated Sustainability Services, 2013)

Scenario 1: Overall macro-economic impact of proposed gold mine over 50 years on the production, GDP-R, and employment for the primary and secondary study areas

Macro-Economic Impacts of Scenario 1 (50 years; R'000 000, 2012 prices)

Economic Indicator Number of years

Construction phase 2

Rehabilitation & Operational decommissioning phase phase 25 1

Farm reestablishment phase 5

Farming

Total

17

50

Production

14888

23278.0

125.6

140.5

150.5

38583

GDP-R

4978.1

11482.0

62.0

47.0

68.1

16637.1

Employment (numbers per year)

15394

3861

187

58

37

Not applicable

Scenario 2: Overall macro-economic Impacts of the current land-use (agriculture) over 50 years (R'000 000, 2012 prices)

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Macro-Economic Impacts During Farming (50 years; R'000 000, 2012 prices) Economic Indicator Production GDP-R Employment (numbers per year)

Direct

Indirect

Induced

Total

350

148.3

121.2

619.5

167.1

59.7

53.5

280.3

14

6

6

25

The results of this investigation found that Scenario 2 had a much smaller positive economic impact in comparison to Scenario 1. The total economic impact of Scenario 1 far exceeds that of Scenario 2 mainly due the amount of expenditure required to construct, operate and close a large open cast mine. Should Scenario 1 be implemented the level of production, GDP, employment, income and government revenue will all be positively influenced during both its construction and operational phases. Whilst the construction impacts will be short-lived, the annual impacts generated by operations will endure for 25 years after which agriculture will be re-established (which again has positive macroeconomic impacts during construction). The proposed mine will also supply the export markets with gold generating important foreign exchange and improving the country’s trade balance. This increases the attractiveness of Scenario 1 from an economic development perspective. However, such a CBA does not take into account social and environmental externalities.

Typically, national Social Accounting Matrix (SAM) and associated multipliers are used as the primary database for a CBA model. SAM are comprehensive, economy-wide databases that contain information about the flow of resources that takes place between the different 31

economic agents in an economy. The defining feature of multi-sectorial macro-economic models is their ability to explain the detailed interdependency between the sectors of the economy and the agents of the economy. These models therefore have the ability to quantify the impact of economic events on the various sectors and agents in the economy and also show the aggregated effect on the macroeconomic variables on the total economy. The models are therefore ideally suited to assess the impact of alternative development initiatives, such as a proposed mining project which will impact on agriculture and tourism. This holds true when SAM and associated multipliers are available, which is fortunately the case in South Africa.

4.2 Towards a standardised model for assessing the net social and environmental impacts of mining in monetary terms?

Unfortunately, the standard approach for Economic Impact Assessment described in the previous section does not apply readily to social and environmental externalities as SAM do not record them. There is no multiplier available to model the social and environmental externalities of a particular intervention. Accordingly, the CBA of a mining project needs to be expended so as to include external costs and benefits to various stakeholders. Using various economic valuation tools (Figure 4, section 2.3) and net present value calculations, it is theoretically possible to calculate the net impact of a mining project – i.e. the integrated net economic, social and environmental impact of the proposed scenario(s), expressed in monetary values (Box 2). This would involve assessing the economic value(s) of each positive and/or negative social and environmental impact (externality), which are linked,

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directly and/or indirectly to stakeholders, at the local, regional, national and/or international level. For instance, these externalities would include those arising from: •

Land and soil degradation and pollution, ground and surface water pollution and

depletion, air pollution as well as habitat, species and ecosystem loss and destruction; •

Mining-induced loss and degradation of livelihoods, such as loss or degradation of

small scale agriculture, grazing pasture and tourism; and •

Social costs increased health care costs and increased family and social breakdown

(e.g. divorce, prostitution, child labour, intra- and inter- community conflicts, communitycompany conflicts).

Box 2: Calculating the Net Economic Impact of a Mine (Houdet et al., 2014b; adapted from UNEP 2012)

Net Economic Impact of a proposed mine = Mine profitability (A) + External benefits to stakeholders (B) - External costs to society (C) = A + B - C Mine profitability = A = net present value of revenues - net present value of internal costs External benefits to stakeholders (positive externalities) = B = sum of net present value of direct, indirect and induced positive economic, social and environmental impacts External costs to stakeholders (negative externalities) = C = sum of net present value of direct, indirect and induced negative economic, social and environmental impacts

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With specific reference to environmental externalities, one may use the Total Economic Value of ecosystems and the associated economic valuation tools to estimate use and non-use values of ecosystems (Figure 4, section 2.3). However, such comprehensive analyses appear not to being actively pursued by Economic Impact Assessment practitioners in most countries, including South Africa. Only a single case study could be found but there was a lack of transparency on the results and methods used (Figure 6). This could be possibly due to the lack of easily accessible, spatially and time relevant, standardised and inexpensive data sets on the external costs linked to both social and environmental impacts. Indeed, the availability and quality of the underlying nonmonetary data is of critical importance so as to generate robust economic models and values6. Figure 7: KPMG’s assessment of a South African gold mine’s true earning for society (KPMG, 2014)

6

The value of externalities can vary significantly, depending in the economic valuation tool used, local site conditions and the changing perceptions of stakeholders. It can also be highly sensitive to changes in interest rates, hence the need for sensitivity analysis of the models (Farrell, UNEP et al., 2012).

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4.3 Embedding ecosystem services valuation in EMPs and closure assessment practices

Beyond Economic Impact Assessments towards building sustainable life-after-mine legacies, there are additional challenges linked to embedding the replacement costs of the underlying ecosystem assets, functions and processes critical for supplying lost ecosystem services in Environmental Management Plans (EMP) and closure costing practices. As shown in Table 4, current closure costing practices are based on relatively old guidelines (Department of Minerals and Energy, 2005) which essentially deal with the costing of the removal of infrastructures and the shaping of landscapes. This is insufficient to ensure that the outcomes of closure activities constitute functioning ecosystems which are capable of supplying diverse ecosystem services to stakeholders, especially local communities.

Table 4: Typical closure costing components (confidential source)

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We thus need to couple ecosystem services restoration models7 and Environmental Management Accounting techniques (e.g. Houdet et al., 2014) and embed them in budgeting for the implementation of EMPs and mine closure activities. Through further research and indepth case studies, the end-goal should be to develop rigorous and standardised guidelines for costing the restoration of ecosystem functions and processes for effective ecosystem services delivery to stakeholders during and after mining.

5-

Final remarks and key recommendations for policy makers, mining companies and

EIPs

The 2013 South African Mining and Biodiversity Guidelines are likely to generate increased interest in undertaking the valuation of ecosystem services within EIAs. Yet, they hold no legal standing. Accordingly, should it be surprising that “mining and prospecting applications within sensitive water production and biologically diverse areas are still being pursued” (Shene-Verdoorn & Ncube, 2014)? As further explained by these authors, in their sample study, “the levels of non-adherence are alarmingly high. The approximately 30% margin of non-adherence by EAPs to the MBG principles is too large to ignore and is cause for concern when considering the context of coal mining and its associated impacts. Lack of adherence to the relevant environmental laws by certain EAPs in the mining sector is one of the gaps that need to be addressed urgently.” While full compliance with the six basic MBG principles is necessary if South Africa is to meet its climate change and sustainable development targets given the impact poor

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Methods and techniques which aim to restore or create viable ecosystems that are able to deliver a wide range of ecosystem services in sufficient amounts to targeted beneficiaries. 36

adherence will have on unsustainable development application approvals, we strongly believe that neither non-monetary values nor monetary values of ecosystem services can be the sole basis for decision-making with respect to ecosystem services. They are complementary tools in a broader basket of tools for more sustainable and accountable mining practices, including the need to continuously monitor changes in ecosystem services due to mining activities. This requirement must be embedded in environmental compliance processes and disclosed to all stakeholders in a timely and effective manner. The analysis of case studies in this paper strongly support the need for referring to ethics, stakeholder concerns and needs, policies, laws and regulations as well as international best practices while designing valuation methodologies and interpreting resulting values in EIA processes. For instance, the case study analysed in section 3.3 (CBA involving monetary ecosystem services values of wetlands) does provide support for the need to better contextualise CBA involving the valuation of ecosystem services. It would have made sense to also assess the potential costs of replacing ecosystem services to be lost as per potential offset requirements. Furthermore, we argue that to mainstream the economic valuation of ecosystem services in a cost-effective manner in EIA process, there is a need for: •

Detailed and regularly updated spatial and biophysical information about ecosystem

services for use by EIPs, mining companies, regulatory bodies and other stakeholders, building upon the work undertaken by SANBI and taking it to the next level (i.e. detailed ecosystem services monitoring and mapping, in terms of supply sources and delivery channels and timing to beneficiaries); •

Developing sector-specific guidelines for ecosystem services valuation in qualitative,

quantitative and economic terms, in different ecosystems / regions and for different types of 37

projects and activities, including different types of mining activities, towards building externality data sets for easy use by all stakeholders; •

Proposing and mainstreaming standardised guidelines and rules for the drafting of

terms of references for integrating ecosystem services valuation in scoping studies, EIAs, EMPs and closure costing assessments, ensuring that Economic Impact Assessments become mandatory, that appropriate valuation approaches and tools are used for all relevant assessments (from impact assessment to closure costing) and that all specialist studies provide relevant quantitative biophysical and monetary values of ecosystem services for use by economists as part of their CBA of project alternatives; •

Developing extended SAM for externalities, in the medium to long term, which would

allow economic impact assessment practitioners to use externality impact multipliers for each sector and region at different scales, while making sure provisions exist to take into account local contexts, legal aspects and ethical dimensions.

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