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Are current models of contract mining supporting sustainability?

Are current models of contract mining supporting sustainability?
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One of the lessons from last year’s violence at Marikana is that the current trend to contract labour in South African mining is not sustainable in its current form. It is estimated that 28% of total employment in the mining industry, and increasing, is today made up of atypical forms of employment, according to the ‘Contract mining in South Africa: Are models supporting business sustainability’ report by professional services firm Deloitte.

Jan-Adriaan du Plessis, Deloitte Consulting Lead: Mining Solutions, says the traditional way of mining in South Africa, with its reliance on cheap labour, is no longer sustainable as the cost of atypical forms of labour steadily increases.

“The sustainability of the contractor model in the South African mining environment is in jeopardy, due to the manner in which contractors are managed and the way in which contractors manage themselves. It is a combination of this lack of sustainability with the growing use of these forms of employment that have contributed to the current instability in the labour market. Furthermore, in some cases it could potentially violate labour standards and fair labour practices.”

The solution, he says, is that mining companies need to take back control of their core mining functions and limit the employment of contractors to cases where essential knowledge gaps exist.

“Until now, this issue has been viewed by mining companies from an entirely financial perspective, whereas Marikana points to a much deeper issue of human dignity – these workers feel that nobody cares,” he explains.

Outsourcing for its own sake is therefore unlikely to work as the model evolves. Du Plessis adds: “This kind of employment, particularly the use of contractors, has historically been viewed as a more flexible, higher-skilled and more cost-effective alternative to permanent labour.

However, it is only those companies which develop a contractor model aligned to their strategic objectives that will prevent the likely scenario of an inevitable spike in costs without the required production benefit to offset the increased cost of insourcing.”

According to du Plessis there are several factors which have contributed to contractor creep at mining companies. These are: the greater ease of employing a contractor, compared with that of employing a permanent employee; the lack of an integrated functional work planning, management and control system at a business level, which can be negated by using contractors; open-ended contracts or poorly defined and managed contract scope, resulting in contractors being used for functions outside the initial intended scope.

The quick-fix of using contractors complicates a mining value chain which already has significant interdependencies that need to be managed. “Dependencies in the core mining value chain where a mix of contractor and mine employees operate within the same area distort accountability and eventually reduce productivity. The negative impact is amplified when the operational objectives and incentives of the different role players are not aligned. This practice ultimately has a negative impact on business sustainability,” says du Plessis.

Typically, where contractors are employed, they are not managed as a strategic asset, as the contracting companies do not necessarily complement the current business model or processes but are rather utilised where current resources and capabilities are inadequate.

“Indeed, in-house skill levels have deteriorated over the last two decades and the demand for certain specialist functions has increased, thereby driving the use of contract labour,” explains du Plessis.

This has had the effect of diluting the focus of mining companies on their core operations of developing, equipping, constructing and stoping, which in turn results in declining efficiencies and declining overall business performance.

Mining companies need to consider the weaknesses of the contracting model, says du Plessis. Contracting companies have a specific remuneration and benefit model that enables them to function at a lower cost base and to remain profitable, while still attracting the best management skills.

Employees in lower job grades are paid significantly lower salaries than permanent mine employees of the same grade and they do not receive the additional benefits of housing, training, medical aid and death benefits that permanent employees receive. On the other hand, senior-level contractor employees, who form a smaller portion of the employment base, are often compensated more favourably than the mine’s senior-level permanent employees.

Employees are also highly incentivised to meet their contractually agreed targets.

However, this model is no longer as successful as it once was, as mining companies have sought to transfer their own cost pressures on to the contracting relationship. Contracts are often awarded primarily on the lowest cost tendered for the required service, which has resulted in a price war among contracting companies with ever-diminishing margins.

In many cases, these companies are making losses on certain contracts in order to retain market share. The increasing cost pressure on mining companies is transferred to the contracting relationship. Contracting companies are also not conforming to the labour demographic goals of mining houses.

“There needs to be a change in the paradigm for sustainable mining, and the way in which companies employ and manage contractors as it will have an impact on their future sustainability,” adds du Plessis.

 

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