Mining is one of Sweden’s most important export industries, but who benefits from mining? How many jobs does it provide and what kind of jobs are there? What happens in case of bankruptcy? Who pays?

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MINING IN NORTHERN SWEDEN

This chapter focuses primarily on mining in the two northernmost counties of Sweden – Västerbotten and Norrbotten. This region had 11 active mines in 2017 and the majority of them are operated by LKAB and Boliden.

The most recent available data from Statistics Sweden on mining employment covers the year 2015 and it shows that 5 881 worked in mining* in northern Sweden. As the figure below (first, left) shows, mining is a much larger employer in Norrbotten than in Västerbotten, but the mining companies are of course important employers at the local level in both counties.

The total value added by mining in northern Sweden was 10,3 billion SEK in 2015. In 2011 when iron ore prices were at an all-time high, the regions mining industry generated a total value added of about 22,9 billion SEK. This can be understood as mining’s contribution to gross regional product (GRP, sometimes called regional GDP). GRP reflects the value of all goods and services produced within the region, minus the value of inputs.

Mining constitutes a particularly large share of the regional economy of Norrbotten county. In 2011, the mining industry generated approximately 20 % of GRP in Norrbotten. This can be compared with petroleum’s share of Norway’s GDP which was 14 % in 2017*. Norr­botten is relatively specialized on capital intensive natural resource industries. This contributes to a relatively high GRP, especially with respect to the size of the population. In the recent years, Norrbotten has consistently ranked among the top three Swedish counties in terms of GRP per capita. A drawback of this apparently productive specialization is that the regional economy has to cope with the effects of volatile commodity price cycles. Mineral resources are comparative advantages for northern Sweden, but there is limited regional or local ownership. The main direct regional income generated by mining is wages earned in the industry. GRP essentially reflects the sum of wages and profits generated in a region, which makes the sum of wages as a share of GRP an interesting comparative indicator on regional ­eco­nomies. The figure below (second, right) provides a comparison of such indicators, cal­culated with data for the year 2011.

As the figure below (second, right) shows, the GRP-share of wages was lower in Norrbotten than in any other Swedish county in 2011. During the same year, Norrbotten had the second highest GRP per capita in Sweden. Large profits are clearly ­generated in Norrbotten and not least by mining. But who benefits from it? The next section will address that, focusing on the mining industry.

WHO BENEFITS FROM MINING?

There are many actors that may benefit financially from mining, but it is important to note that there may also be those that are negatively affected. This is addressed in a later section of this chapter. In this section, we adopt a ’gross perspective’ and attempt to compile a list of different types of actors who may benefit from mining, with respect to the Swedish tax- and regulatory regime. These include:

• Owners (dividends)

• State (taxes, fees, dividends from state-owned LKAB)

• Employees (wages)

• Suppliers of a wide range of input goods and services (contracts)

• Land owners (fees)

• Other actors who benefit from increased demand (hotels, retail trade etc.)

• Municipalities and regions (income tax payments)

• Miscellaneous beneficiaries (research funding, sponsorships etc.)

SGU has compiled key figures on the Swedish mining industry which ­provides information on the size of profits, dividends, tax payments and wages in relation to turnover. These are provided in the figure below and they illustrate how volatile the last few years have been. Combined profits were approximately 15 billion SEK in 2011, but the aggregated outcomes in 2014 and 2015 were losses. The main reason was bankruptcies (Dannemora and Northland Resources). Profits were up again in 2016 to approximately 1,5 billion SEK.

COSTS AND BENEFITS

Mining can generate substantial profits and other positive economic ­impacts, but a mine always has an environmental impact and it can also affect individuals, communities and other economic activities in negative ways. In the field of economics, positive and negative impacts are often ­characterized as ’benefits’ and ’costs’. In some contexts, researchers may attempt to value these costs and benefits. The sum of benefits, less costs, then equals net social benefit – i.e. the value for society. We will certainly not attempt to value the net social benefits of mining here, but we will provide conceptual examples of different positive and negative impacts - benefits and costs – that may be associated with a mine. Many of these benefits have also been addressed in more detail in the previous section.

Positive impacts: benefits

The most obvious positive economic impact of a mine arises when it ­generates profits for its owners. In the Swedish context, a firm which gene­rates profits also pays corporate tax. In addition, a mine generates jobs, both direct and indirect (e.g. in suppliers of input goods and services) and the ­employees earn incomes. In the Swedish context, these employees pay regional and local income taxes which contribute to financing the welfare ­system. Mining companies are also required to pay a mineral fee to land owners and the state. Finally, other external benefits may arise, such as ­increased demand for services, consumption spending, improved infra­structure etc.

Negative impacts: costs

Developing a new mine will always incur substantial private costs (capital and operating costs) for the company and its investors. These are internalized in the investment appraisal and should be recovered through sales of the product, and hopefully with an additional profit. There may however arise a number of negative effects that are not taken into account in the price of the product. This may create burdens for actors that do not enjoy benefits of the mine in the same way as its owners. In the field of economics, such negative effects are often called ‘external costs’ and they comprise different negative side effects of production or other activities. Common examples include ­various negative environmental impacts (pollution, dust, noise etc.) that are not paid for by the ‘polluter’. A mine can also displace other forms of land use in an area, including for example reindeer herding, nature based tourism, or recreation (as well as combinations of these and other forms of land use) and cause social disruption. These are examples of negative impacts which can be difficult to value. There is also a risk that relatively large scale mining operations may crowd out other local economic activities by driving up wages and prices in general. Finally, mining communities have to live with cyclical commodity markets which means that investing in for example housing may be risky.

Net social benefit: benefits-costs

The discussion we outline above leads to the conclusion that there is an important trade-off between positive and negative impacts – benefits and costs – associated with a new mine. From a socio-economic perspective, one can argue that there should be an assessment which determines if the outcome is acceptable or not. This will of course depend on the context. The ­environmental impact of a new mine is an important aspect and it will depend on for instance mining technology, the type of mineralization etc. This is addressed in more detail in another chapter and it is important to note that mining in Sweden has to comply with a strong environmental legislation.

Another important aspect to consider is the localization of a new mine – will it impact a local community and/or is there competing forms of land use in the area? It should be emphasized that net social benefits of mining are practically never estimated, at least in Sweden. Such calculations are highly complex and would likely be hard to legitimize. In practice, stakeholder dialogue and expert analyses in environmental impact assessments (EIA) and social impact assessments (SIA) can provide guidance on the relevant trade-offs between positive and negative impacts and identify appropriate mitigation strategies. During the recent decades, the role of local communities has become more influential due to the mining industry’s increased focus on sustainable development and social license to operate.

LOCAL/REGIONAL SOCIO-ECONOMIC EFFECTS: WHAT DOES RESEARCH TELL US?

This section summarizes lessons from research on mining and socio-economic development in northern Sweden. The text is largely based on the final report of the Interreg Nord-project SusMinNor (see Lesser et al. 2016).

First of all, the local/regional economic impact of a mine is an important aspect of its sustainability, which is clearly interconnected to its ”social license to operate”. If a mine does not generate local benefits of any kind, the affected community will only experience its adverse impacts. Research has also emphasized that ’local vs non-local’ is a key factor when it comes to labour, supplier contracts, and other benefits. The local community can absorb more of the benefits generated by the project if there are strong (or at least some) linkages between mining and the local economy. The formation of such linkages requires that sufficient capacity exists (or can be developed) in terms of skilled labour, competitive suppliers etc.

Contemporary mining companies tend to focus on core activities and outsource related functions. This provides SME opportunities in for instance various mining services, consulting, equipment development and manufacturing etc. Local SME’s may struggle to compete with regional, national or even international competitors in procurement processes. One way of enhancing local capacity is by pooling SME resources to bid on contracts together, and to pursue dialogue with the mining company about potential opportunities.

Access to housing can act as a bottleneck for local development. Without sufficient housing in a mining community, there will be a greater reliance on long-distance commuting to the mine. In the Swedish tax regime, income tax is paid where a person lives and if a mine relies largely on non-local labour, the local municipality will miss out on potential tax revenues. This may be difficult to resolve, as housing investments in mining-dependent communities may be associated with risks due to the volatile nature of commodity markets. In addition, the workers may simply prefer to live elsewhere, independent of the local housing situation.

Concerning different forms of spill-over effects of mining, research from Umeå University (see Knobblock, 2013) has pointed out the importance of both formal and informal networks between mining companies and other actors. The existens of such networks in Västerbotten county is said to have contributed to an innovative environment with a number of new businesses in both core- and related mining activities. Furthermore, Wiberg, (2009) has argued that successful regional cluster building processes during a mining boom can reduce the vulnerability of labour demand compared to growth in mining and exploration alone. The success of such a process is said to depend on the ability to internationalize and expand the market of the cluster; the level of entrepreneurship (i.e. having, or attracting, individuals with the necessary drive and capabilities); and sufficient access to skilled labour. This view promotes the development of skills and competencies around mining as sources of regional competitive advantage, rather than the resource itself.

There are also studies that have attempted to measure the economic effects of mining, or the economic impact of individual mines. A recent study by Tano et al. (2016) showed that labour incomes in northern Sweden had increased rapidly among workers in mining and also in construction, during the mining boom that emerged around 2005. The researchers also found evidence of spill-over effects on labour incomes in non-mining sectors in the mining towns.

During the mining boom, several impact studies used simulation models to estimate the impact of planned mines on local and/or regional employment. These estimates suggest that a new mine can generate between 30-120 additional jobs for every 100 direct job at the mine. The variation between these estimates can largely be explained by different assumptions about the future demographic development, ranging from modest to expansive). Can a mine reverse a declining demographic development?

A recent study by Moritz et al. 2017 used an econometric approach to analyze mining industry employment in northern Sweden ”ex post” – i.e. the researchers examined the actual development and did not rely on ­simulation models. The study found that the mining industry had ­generated approximately 100 additional ­regional jobs for every 100 direct job in ­mining. If this result is accurate, one can crudely ­estimate that the mining industry in northern ­Sweden ­generates approximately 12 000 jobs direct, ­indirect and through induced effects (i.e. ­generated by increased demand for services, consumption spending etc.).

CASE STUDY: THE KAUNISVAARA MINE IN PAJALA

The development of an iron ore mine in the village of Kaunisvaara outside Pajala was discussed already in the 1970s, but the plans were not realized until decades later when high iron ore prices had made the mineralization interesting again. A Canadian exploration company - Northland Resources - announced plans to develop a mining operation and the small municipality which had experienced declining development saw the potential for new jobs and positive development. The Kaunisvaara project in Pajala offers an opportunity to observe how a relatively small local economy changed during the development of a new mine. We emphasize that these observations are intended as an empirical example and should not be interpreted as a rule of thumb. The effects are context specific, at least to some degree.

The construction of the Kaunisvaara mine started in 2010 and iron ore concentrate production commenced in late 2012. The mine was producing at about 50 % capacity in 2014 when it closed due to bankruptcy, which has been attributed to a combination of capital cost overruns and falling iron ore prices. At this point, direct employment was approximately 200 at the mine and 200 at the transport sub-contractor.

By calculating the change in a few common indicators on economic development between 2009 (pre-mining) and 2014 (the last active year), we can observe a strongly positive development in local employment and incomes during the mining era. Local respondents who followed this development closely in their professional roles have argued that the majority of this growth can be attributed to the mine either directly or indirectly. These indicators are reported in the figures below. Specifically we find that:

• The growth rate of local per capita income greatly exceeded national average during the mining era.

• The local labour market participation rate was below the national average before the mining era, but had surpassed the national average in 2014.

• Nearly 800 new local jobs were created between 2009 and 2014. This crudely suggests a 1:1 ratio of direct to indirect employment.

THE MINERALS MARKET

Mining operations take place all over the world, and the price of raw materials is decided by global supply and demand. Demand is governed largely by the economic cycle, our consumption of goods and investments in infrastructure and industry. Sweden is one of the biggest mining countries in the EU and is also a considerable producer of zinc and lead globally, in 10th and 9th place respectively among the world’s biggest producers. As of 2016, 91 percent of the EU’s iron production was in Sweden. At mid-2017 there were in all six companies extracting metallic ores at 14 places in Sweden. The industry is above all dominated by two companies: the state-owned LKAB, which produces iron ore, and the privately owned Boliden Mineral AB which produces base metals, tellurium, gold and silver. The mine cluster and its indirect effects contributed 128,000 mSEK to the GNP in 2013, corresponding to about 3.3 per cent*. Sales in the mining industry amounted to 37,300 mSEK in 2012. Dividends, provisions and state taxation amounted to over 10,000 mSEK. In Sweden it is a legal requirement that prospecting and mining operations be operated via Swedish-registered companies (AB).

* Tillväxtanalys. Sverige – ett attraktivt gruvland i världen? En internationell jämförelse (Rapport 2016:06).

WHAT HAPPENS AFTER BANKRUPTCY?

Companies which for different reasons cannot continue operations can apply to file for bankruptcy. In the case of mines it can among other things be a question of liquidity problems, difficulties in achieving profitability or low metal prices due to a changed market. Mines are special in that they are so-called hazardous operations. When operations stop, waste management is also closed down, which can mean increased risks to our health and the environment.

In Sweden, PPP applies (Polluter Pays Principle) which means that the polluter shall always pay for the pollution. To ensure that the community (=taxpayers), does not have to pay for restoration of mines and waste dumps, or other environmentally hazardous operations, an economic guarantee shall be put up by the company.

The economic guarantee varies depending on the operation and shall be considered ample and provide for the need of security at any time*. In a report from the Swedish National Audit Office in 2015, the total guaranteed amount was 2,700 mSEK.

Since the turn of the 21st century up until 2017, four newly started mines have become bankrupt. In these cases the economic guarantee has not been sufficient and the intentions of the law have not been fulfilled. This has led to negative ­environmental consequences and major restoration costs to the state. Since then, several measures have been taken, including a report from the Swedish National Audit Office** and work has been done to produce a strategy for sustainable management of mining waste***. Mining operations have taken place in Sweden for over 1,000 years, which has led to mines and waste which are not managed by anyone today. In cases where there is no responsible party for historical mines, the state takes over and pays for any needed restoration. This has occurred, among other places at Gladhammar mines in Kalmar County. Mining went on here in the 19th century which left mining waste from which metals leached into nearby lakes and watercourses. Restoration began in 2011 and has cost around 63 mSEK.

Up until the end of 2016, the total cost to the state for restoration of both bankrupt and historical mines amounted to about 710 mSEK.

*** http://www.regeringen.se/regeringsuppdrag/2016/04/uppdrag-att-ta-fram-strategi-for-hantering-av-gruvavfall-och-gora-en-bedomning-av-kostnader-och-atgarder-for-efterbehandling/