Acquire Procurement Services | Can Safety be bought in Mining Services Contracts? Beware the Cobra Effect

Mining safety has come a long way in Australia and now is at a point where the safety cultures of some of the Australian miners are considered leading practice in the world. As mining operators continue to improve productivity and reduce their bottom line, mining services providers remain paramount for delivering business outcomes.

One common question we get from our operator clients is What should be done to ensure Safety is paramount in a Mining Service relationship? What are the roles of the supplier and the operator and what’s the best way to promote a safety culture when designing the mining services contract?

In an environment where there are such significant regulatory and reputational impacts, the operator takes on almost all responsibility for safety and the risks of not having a safe environment.

This article combines some of the various literature on the topic to help you determine the most suitable considerations to be made when including safety considerations in the commercial model of your mining services contracts.

Some Key facts:

1	Of the 139 worker fatalities in Australia in 2016 YTD, 4 of them have been mining workers (compared to 10 last year in 2015)
2	There were 10 deaths in mining in 2015, equating to 4.4 fatalities per 100,000 workers (up from 3.9 the year before)
3	In 2014, the Australian Journal of Mining reported that of all mining fatalities for that year, over 70% of them were contractors
4	There were 2,670 serious workplace injury claims in mining in 2013-14, which equated to 4.6 serious claims per million hours worked or 10.4 serious claims per 1000 employees
5	In 2014-2015, $14,851M was spent on contract mining services in Australia
6	Contractors now account for more than 41% of full time equivalent employees in the Queensland mining workforce
7	Fatalities in 2016 YTD in other Australian industries include Agriculture, forestry & fishing (34), Transport, postal & warehousing (46), Construction (22), Manufacturing (1) and Electricity, Gas, Water & Waste Services (7)

The Challenge:

While the industry has made significant improvements in the areas of safety, the fact is, we can always do better. The outcome that all mining operators want is for is every worker to go home safely. In this light, contract owners are consistently looking for models for their mining services contracts that fosters a culture of safety first before production.

In a 2007 report titled ‘The Truth about Safety Incentives“, Karl and Deb Potter commented that two philosophies seem to exist: One which says that suppliers and employees will not work safely unless an incentive is given to do so while the other argues that incentives should not be required for suppliers and employees to do their jobs without injuries. The former philosophy then raises the same question that executives have been trying to answer over the last decade, “what are the right safety performance indicators in my organisation, and how should I incentivise my supplier to achieve them?”.

So why is this so hard to solve?

The number of variables involved in aligning incentives when involving human behaviour is difficult and has been the subject of discussion amongst academics in a field of research called Contract Theory.

A quick review of the history of Mining Safety and Safety Incentives in Australia:

Work health and safety (WHS) in the mining industry is regulated by states and territories, not at a federal Australian Government level.
In 2007, the NSW Wran Review into Mine Safety recommended an independent assessment of production bonus and safety incentive schemes. The Mine Safety Advisory Council (MSAC) commissioned research on issues in the NSW mining and extractives industry, which was known as the Digging Deeper Project. The study concluded that:
- Recognition and reward schemes should be reviewed and developed in line with good practice principles;
- The NSW mining industry should no longer pay workers in the industry money or equivalent benefits as a result of achievement of particular targets for outcome data, for example Lost-Time Injury Frequency Rates (LTIFR) and Medical Treatment Injury Frequency Rates (MTIFR); and
- Sites with production bonus schemes should carefully review them to ensure that the payment is not creating a disincentive to address adverse OHS consequences of current working arrangements.
Since then, there has been an industry agreement that safety incentive schemes need to focus principally on lead indicators and reinforcing positive safety outcomes rather than on lag indicators as is often the case. As part of this focus, safety incentive schemes need to move to rewarding employees and suppliers who take positive steps to improve WHS on sites, as opposed to being seen to be penalising them for reporting injuries.

Views on Safety:

There are various views on safety amongst mining operators. These include:

Safety should always be put ahead of production
Safety is a culture, instilled by the leadership of an organisation. It is however, for a contractor to determine how they are best suited to manage their own safety as long as it aligns with, or is better than that of the mining operator it is working for
When selecting the right supplier, a key consideration should be their safety culture. Managing the supplier and monitoring their safety culture should be done as good contract management process
Contractual requirements for safety don’t necessarily lead to an improved contractor safety culture

The Cobra Effect and Safety Incentives:

For those who aren’t aware of the Cobra Effect, it occurs when an attempted solution (by way of an incentive) to a problem actually makes the problem worse. In the context of mining safety, the cobra effect has been seen when implementing contracts that have either a high financial incentive for safety or a specific focus on one type of safety activity. While the intent of the initiatives are designed to help improve the safety culture, in some cases they have ended up being detrimental to the overall outcome.

Examples of situations where safety incentives removed the incentive for contractors to report incidents include:

where contractors were rewarded for the achievement of outcomes and the measures or targets used covered the whole site such that if there was a lost time incident in one part of the site, the payment for everyone on site was affected.¹
where rewards were largely linked to lag indicators (such as Lost-Time Injury Frequency Rates (LTIFR) and Medical Treatment Injury Frequency Rates (MTIFR)²

Why safety Incentives haven’t worked in Mining:

The article, The Truth about Safety Incentives, observes that while incentive programs have helped some organisations turn their safety performance from negative to positive but over a period of time, safety incentive programs have often become:

1	Ineffective	They lose their appeal to employees and it becomes too much work to keep up with the required paperwork.	In the context of mining services, are contractors expected to fill out paperwork for both your company and theirs? How are incentive programs monitored, managed and reported?
2	Entitlements	Employees come to expect the incentive no matter what the outcomes are, particularly when monetary rewards are involved.	Is your mining service contractor charging you a safety bonus or premium, even though you as the contract owner wear most of the risk? If your organisation has a strong safety record and culture, should they be paying you?
3	Routine	When the program remains the same year after year, people don’t really pay attention to the expectations and the rewards.	When was the last time you did a supplier audit to see who were the ‘safety innovators’ that were helping create the safety culture that you want in your mining operation? Has the program had a refresh and how do your mining service contractors help in this evolution?
4	Punitive	When group rewards are part of the program, employees can be very punitive to one another when an incident occurs that “messes up” the reward.	Mining service providers range in size from small family businesses to large organisations. Who in that organisation getting the benefit of the incentive and is there an inadvertent punishment when an incident occurs?
5	Irrelevant	Often employees do not see why their company leaders think they have to pay them to work safe. After all, isn’t safe work behaviour part of the job?	Do your mining service contractors (both management and employees) already have a robust safety culture which they work towards already?

Finding the right indicators for a Safety Incentive:

When considering safety in your Mining Services Contracts, selecting the right safety indicators to include in your contract depend on your organisation and the supplier. In a article called The Wrong Key Performance Indicators Can Drive the Wrong Behavior (May 2016), Mieke Jacobs listed a few critical questions in order to find out what the organization (and your supplier) can realistically expect to achieve:

How would you describe the safety maturity of both organizations?
Where are each of the organisations in terms of safety culture, and where do you want to go?
What behaviour are you trying to drive with a variable compensation system?

The maturity of both organisations and the systems and technology in place often influence the design of the indicators and the incentive model. The article went on to talk about a few indicators used by a global mining operator that might be a consideration for your Service Contract:

5S performance
Execution of safety action plans
Organization of safety briefings
Reporting of near misses
Execution of safety audits

What this list does well is include a mix of leading and lagging indicators that could be used to promote safety within the mining service contract relationship.

What should I do?

It’s important to remember that the mining service contract is not the solution to everything. Some supply arrangements may not require any additional safety considerations other than your standard legal terms and conditions. By including safety incentives within the contract, it also doesn’t necessarily mean that a behavior change will result from the contractor. It’s important to spend time with your own team and your suppliers to work out what is right for the services being performed. As an organisation and as a contract owner, it’s important to continually to monitor and manage your contract relationships to ensure that safety is, indeed, first.

If you have any great stories about how you’ve successfully driven safety performance in your mining services contracts or lessons learnt in this area, we’d love to hear from you. The next time you are looking at including safety into your mining services contracts, we are more than happy to share what we know. For more information, please contact Simon Thompson.

Useful Resources:

The NSW Department of Industry – Resources and Energy, have released a tool to review safety incentive schemes in your organisation. The tool is a starting point and could easily be adapted to working in a Supply arrangement. The resource is available here.

Source:

¹Digging Deeper Wran Consultancy Project. Independent Consultant Report by Shaw Idea. Commissioned by NSW Mine Safety Advisory Council, 2007, Vol. 1, p. 51.

²Reviewing Safety Incentive Schemes, NSW Mine Safety Advisory Council, September 2009, version 1.0.