Social licences have become the cornerstone of Justin Trudeau’s thought-provoking policy about energy-project developments. They have also become a main reason why western provinces and the business community have started to doubt the prime minister’s leadership and his willingness to stand for a healthy energy sector.
To begin with, nobody exactly understands (and never will) what a social licence is. Yet, at least two things are certain.
First, the extractive business industries deeply transform ecological milieus, communities and economies — and often generate conflicts.
Second, getting a social licence involves a relatively broad and unpredictable consultation process where local communities can give an opinion, be heard, and eventually, in extreme cases, exercise a veto.
Would relationships between local communities and the energy sector in Canada receive greater priority and attention if the costs of conflict experienced by the industry were better understood?
International research published by the Corporate Social Responsibility Initiative at Harvard Kennedy School in 2014 shows that most extractive companies do not currently identify, understand and aggregate the full range of social-licence costs into a single number that would catch the attention of senior management or boards.
The most frequent costs result from lost productivity due to temporary shutdowns or delays, according to the research. For example, a major, world-class mining project with capital expenditure of US$3 to $5 billion will suffer approximately US$20 million per week of delayed production in Net Present Value (NPV) terms, largely due to lost sales.
The timeframe for new projects to come on-stream nearly doubled in the previous decade
The greatest costs of conflict were “the opportunity costs in terms of the lost value linked to future projects, expansion plans, or sales that did not go ahead.” The most overlooked indirect costs were those “resulting from staff time being diverted to managing conflict — particularly senior management time, including in some cases that of the CEO.”
The apparent flaws that have severely damaged TransCanada’s interactions with Quebec local communities and politicians suggest that the energy industry still has a long way to go to fully recognize the significant managerial, operational and reputational costs of a social licence.
Undeniably, these costs are bound to increase. A 2010 report to the UN Human Rights Council, citing a Goldman Sachs study of 190 projects operated by the major international oil companies, suggested that the timeframe for new projects to come on-stream nearly doubled in the previous decade.
While the business costs for social licences will keep rising, their political costs might soon prove to be very expensive, too.
Social licences go hand in hand with people’s right to freely organize their communities based on their own personal convictions. In many ways, this right represents a considerable civilizational advancement.
However, there is a darker side to the fairy tale of stakeholder self-regulation and state disengagement. Social licences come also with political fragmentation that happens when people see themselves disconnected more and more from their fellow citizens in common projects and allegiances. No wonder people and locally based organizations infused with a social-licence doctrine have difficulties reconciling their interests with the common good of the Canadian society.
This lack of identification is not just fuelled by sovereigntist attitudes. It also reflects a more deeply fragmented way of thinking, in which activists and even political representatives increasingly see the Canadian state in purely instrumental terms. It fosters disunity, since the absence of effective common action at the federal level only serves to throw communities back on themselves.
The energy sector and the Canadian federation are both immensely valuable but fragile resources. Underestimating the business and political costs of social licences might weaken Canada economically and politically, with the cost of repair weighing heavily on the next generation.
Bertrand Malsch is associate professor and Distinguished Research Fellow in Accounting, Smith School of Business, Queen’s University.
https://business.financialpost.com/fp-comment/when-social-licence-costs-become-unbearable