We live in a world where goods and services are increasingly the output of global production networks. The materials and processes that go into making a product almost certainly emanate from separate actors located in different jurisdictions. Bringing them all together to deliver the right product at the right time and price to satisfy a volatile market demand is a mix of art and science. These production networks always have a hub, focal point or agent that plays a coordination role. This may be a brand (Ford for example), a project manager (as is often the case in construction) or an independent agent providing the specialised service of supply chain coordination (such as Li&Fung in apparel). In many ways, traders like Trafigura play a unique role that combines some of the features of a brand, a project manager and an agent.
Getting to market is no longer enough, however. The product, and the value chain behind it, must demonstrably meet the human rights and environmental expectations of consumers and regulators. This imposes obligations on companies that are leading some parties to issue integrated annual reports combining social, environmental and financial performance and prospects.
Global production networks are dynamic, constantly adapting to a range of factors from geo-political, economic and financial shifts to climate change and natural disasters. The brand, project manager or agent driving the production network has to perform due diligence on these risks and intervene to mitigate or avoid them.
It is far from clear how the various actors in the production networks share responsibility for risk management, especially when these risks occur at another point in the network, possibly in another jurisdiction. Effectively we have created interdependent global production networks without any interdependent system of governance or accountability.
Every product market is a complex web of organisational relationships. The ties between the different network actors may vary from strategic and long-term to contingent and short-term. In some product categories, relationships are close-knit: suppliers may conduct research and development or co-create the product, whereas in others, engagements are entirely transactional. The former system of partnership produces positive-sum outcomes, whereas the latter, more transactional version is a zero-sum game.
Both partnership-based and transactional production networks present significant challenges to the performance of due diligence and the management of risk. The brand, project manager or agent driving the network may lack the visibility and the data to determine material risks, let alone manage them.
Setting, maintaining and reporting against standards is the most pressing challenge in the management of global production networks.
Contingent, short-term relationships are more common in product markets that have low barriers to entry and intense price competition. In these markets, companies considering whether to “make-or-buy” are likely to buy - outsourcing and subcontracting everything except the most value-added core competencies. In the process, they lose a degree of control over supplier performance on production, human rights, health, safety and environment.
This logic of outsourcing and subcontracting in mining, manufacturing and services is not new. In 1922 Henry Ford predicted in My Life and My Work that future manufacturing would not take place under one roof. Instead, it would be distributed to legally separate producers then the parts brought back together to be assembled. This logic of dividing and distributing the production process amongst different suppliers according to comparative advantage led to the development of global production networks of legally distinct entities.
The extractives sector has operated in this manner for a long time. The oil value chain is subcontracted and outsourced from exploration to the petrol pump, and oil rigs may have a dozen or more subcontractors working under the umbrella of the operator. Mining operations are similarly subcontracted. This approach started with specialised activities like shaft sinking or access development and gradually extended even to core mining activities.
The logic of outsourcing and subcontracting has been pushed to new limits by technology. The growth of platform work, sometimes referred to as the gig economy, has allowed companies to distribute work to freelancers via applications. These virtual companies are able to achieve degrees of flexibility and cost efficiency that physical companies can only dream of. Other supply chains are also evolving and developing new paradigms of production. Even highly technical manufacturing processes have been outsourced and subcontracted, and this pattern will be extended by new technologies such as 3D printing that allow for yet greater decentralisation.
While decentralisation may share or transfer financial risk along the network, it also spreads human rights and environmental risks, but without the controls that have been developed to manage financial risks.
The complexity of distribution and management of risks in production networks is exacerbated by the volatility of markets and the intensity of competition. This imposes a constant search for flexibility, speed and cost efficiency. At the operational level network, actors must be able to ramp production up or down and respond more quickly to market movements. Flexible workforces and production schedules are essential.
However, labour laws in many countries have cumbersome and expensive employment provisions, including hours of work and overtime that limit the flexibility of companies. These labour market rigidities lead to subcontracting, outsourcing, and contingent forms of employment. The recent strike at General Motors in the USA had a lot to do with the company's practice of using temporary and tier two workers to bypass rigid and expensive tier one employment contracts. Similarly, manufacturers in Turkey have resorted to not registering their workers in order to avoid high costs of employment, or they are using subcontractors that employ unregistered workers in turn.
The growth of artisanal and small-scale mining (ASM) can be seen as an extension of this trend. Whether planned or not, ASM serves to increase output at lower cost and provide flexibility, enabling mining activities to expand or contract rapidly in response to market conditions.
As in other forms of subcontracting that are usually motivated by the search for increased capacity, lower cost or specialised functions, ASM performs an important role. How artisanal mines become included in the production networks depends on the complexity of the product, the technology involved and other process requirements. If the type of mining requires specialised drilling equipment and heavy machinery, for example, ASM would not be logical subcontractors. However, if the type of mining involved has lower barriers to entry and intense price competition, ASM would make a lot of sense.
You could also imagine decentralised scenarios where a company secures a mining lease and then “makes the market” in which different contractors compete to provide their specialised services. The leaseholder may even play a role in the provision of finance, equipment, logistics and marketing. The most decentralised scenario of all would be the system that some traders use of simply setting up offices near ASM sites and buying the output.
The blend of formality and informality in mining production networks could vary from highly formalised mechanised mining with no ASM through to sites with only ASM. The degree of engagement of the agent or trader could also vary. We could classify these business models as follows:
- fully owned and operated
- owned and partly operated/partly ASM
- owned but operated by ASM
- no ownership, only trading.
ASM in extractives, subcontractors and home workers in apparel, out-growers and seasonal workers in agriculture, and freelancers in technology companies all provide the adjustment mechanism that allows production networks to expand and contract in response to market dynamics. The intermediaries - brand supply chain managers, project leads or traders - need to facilitate and enable those responses and ensure that the risks are being managed. This could be done through the provision of information, technical assistance, finance, purchase contracts or services. The Trafigura and PACT project at Mutoshi mine in the Democratic Republic of the Congo, for example, provides many of these forms of support.
The idea of including ASM in mining production networks is obviously controversial and there are many risk factors to be considered. Artisanal and small-scale mines are frequently informal operations with a lack of appropriate equipment and production methods, inadequate health and safety standards and unacceptable working conditions. Human rights issues such as child labour and forced labour are all too present and the involvement of criminal networks cannot be excluded. However, it is almost impossible to exclude ASM when local conditions favour its involvement. It may be better to make a virtue of necessity and “regulate” or recognise the role of ASM, as Trafigura has in Mutoshi.
Ignoring the reality of ASM in locations where it is present is only delaying the inevitable. The unacknowledged and unregulated activities of ASM will grow until an accident or security incident results in a crisis, with all the reputational and operational damage that can be expected to accompany such an event. The more prudent and productive option is to define the role for ASM and set ground rules and production standards, as with any other subcontracting arrangement.
Who enables or facilitates this integration of ASM and other subcontractors into mining production networks in a responsible manner will vary, but traders play a key role in the networks. A number of organisations have already articulated this expectation and provided guidance as to how traders might meet it. The Swiss Government, for example, published The Commodity Trading Sector Guidance on Implementing the UN Guiding Principles on Business and Human Rights that sets out some of the ways in which traders can play a role in ensuring that the human rights and environmental risks are identified and managed, complimenting the guidance documents published by OECD and other international organisations.
A multi-stakeholder approach would be an effective way of setting ground rules for the integration of ASM into mining production networks. Artisanal miners themselves could be included in the process, and the involvement of international and national organisations would bring expertise, funding and legitimacy to the table. In many ways this would just be a case of formalising the informal rules that already govern sites where ASM is present, but with the added credibility that comes from multi-stakeholder involvement.