To help address the gap; as part of the knowledge exchange leading up to The Responsible Extractives Summit, Ethical Corporation brought together 2 experts in this area for a constructive chat about Creating A Successful Local Content Strategy in our webinar featuring:
Interactive voting responses
As Mel Case mentioned in her opening statement for the webinar, local content is essential regardless of size and scale because it allows people to become part of the project, providing them with a first-hand experience of the challenges and opportunities that companies face.
However, two-thirds of our listeners mentioned that they do not have a clear local content strategy.
Jeff Geipel stated that an increasing trend is to have more local content strategies and it’s only a matter of time before most companies have one.
Interestingly, when asked if local content requirements from host governments are too high, the majority of attendees (92%) said that LCR’s were either manageable or too low – perhaps a reflection on the numerous benefits that good local content practises can provide business. An interesting point to consider here is that, although most attendees agree that local content requirements are manageable, many are not enacting a relevant strategy.
The majority of attendees (83%) also highlighted that LCR’s are likely to increase as resource rich governments look to use mining, oil and gas as a catalyst for socio-economic development.
Jeff mentioned that the increase in LCRs has been happening over the past decade, in particular on two main fronts. First, with the African Mining Vision’s release in 2009 and its focus on increasing local content, virtually all new mining codes across the continent have included local content clauses. Second, legal agreements with Aboriginal communities in Canada and Australia, such as Impact Benefit Agreements (IBAs) are only becoming more comprehensive and are including more focus on local procurement and supplier training.
Mel also highlighted the increase in both Australia and Canada and foresees LCRs becoming more prescriptive in nature i.e. setting specific targets and quotas for local procurement and employment.
Jeff also provided some insight as to why LCRs are increasing in the current economic climate: Oil, Gold, Iron Ore and the majority of metals and minerals are hitting low points in their price cycle, which means that there is little to show to governments from tax revenues; just one reason why it is important to get ahead of the curve on Local Content.
The ability to demonstrate the impact extractive projects have on the local economy through the multiplier effect is an important tool that can be used to increase access to resources. However, 67% of respondents state that they do not effectively report or communicate the contribution that local content from their projects make towards the community.
Mel mentioned that improving local content is always on a company’s mind, a statement with which Jeff agreed, who went on to explain that companies know that supplier development will save money. However, there are a number of challenges that need to be considered when putting together a local content strategy. In the following sections, we will investigate the solutions to these challenges and provide practical solutions, drawing examples from case studies that both Mel and Jeff have been involved in.
Challenges and solutions
One of the main challenges stems from the fact that community expectations are always evolving. On Curtis Island – where a Bechtel-led team is building three LNG facilities simultaneously in Gladstone Australia – Mel mentioned that communities, as part of the social license, expected to have greater benefits from developments – a trend that has been happening for some time.
Jeff highlighted that policies need to be made in coordination with partnerships, because banks, chambers of commerce and economic development organizations can have valuable input and good local content is in their interests.
Mel has found that “getting people involved” is the key to a successful strategy, both through understanding customer requirements and understanding community capacity on a project-by-project basis.
Understanding community capacity requires examining the local resources available and understanding the gaps in skills and capacity, but more importantly, thinking about what is needed to build capacity.
Engaging and communicating with communities is not just a “nice to have”, but the right thing to do because it helps the community understand the project through involvement.
It’s also important to highlight that the community do not need to be part of the main construction efforts to be a supplier; there are lots of opportunities through indirect procurement and support services such as cleaning.
Whilst engaging with local businesses, it is also important to look at opportunities for joint ventures, capacity building and government assistance. Supplier engagement is a two-way education process, as well as talking through a company’s expectations through quality, safety and other requirements – it’s also a great way to find out about the knowledge and skills available from local resources.
Jeff built on this, saying that you need to spend time doing a good assessment of what’s going on. Once you have decided what you can buy locally, look at opportunities to perform supplier development, and focusing on what the issues are, e.g. if they are technical or business skills issues, setting targets based on empirical evidence, which will improve government negotiations and creates realistic targets.
It’s important to understand your requirements too; particularly in the form of any agreements with governments, impact benefiting agreements (IBAs) or commitments that have been agreed as part on of a social impact management plan.
Jeff also highlighted the need to involve the community in the gap analysis process which involves an investment of time, an investment which help you gain trust and social understanding. It’s also worth highlighting that there are some fantastic examples of initiatives out there, so it’s worth doing your research and looking for components that would work for your business.
This leads on to the challenge of defining what is local, as a major project will encourage economic migration – an aspect beyond a company’s control but one that can have an impact on the social license to operate.
The key here again is collaboration, define what is local together with your stakeholders and local groups and focus on what will contribute to economic development.
“local-local” is what companies care about from a stakeholder engagement perspective, but you also need to consider actually making development happen across the wider country.
A good place to start is by looking at the guidance from the environmental phase of a project and making changes based on guidance. This is unique per project and you will only find out what is local in the eyes of your stakeholders by engaging with them. Mel mentioned that local in Gladstone was considered anything within a 60km radius or a 90-minute drive away (as set out by the government.) However, for a separate project in the Middle East – “local” meant two nearby towns. She also recommends that as part of a local content strategy, you need to have a clear definition on priorities of local, state/province then national and international when it comes to selecting suppliers for the project.
Moreover, challenges can occur within your organisation. For example; Mel highlighted that internal procurement procedures can disadvantage local suppliers and it is an immediate need to investigate the impact that these will have on local suppliers’ ability to undertake projects.
Local supplier capacity is a big issue for mega projects, as communities will pick off a really big piece of a project that has significant value but that they are unable to fulfil. What’s more, local suppliers often charge a hypothetical “local tax” believing that they should win contracts because they are local without being cost-competitive.
Local companies need to be aware that they must be cost competitive. A very important aspect for businesses to understand, this is done by working harder to build capacity with local businesses and is dependent on the project and location. Joint ventures, i.e. projects co-owned by separate companies, are another great way to build local supplier capacity and competitiveness, as again, each project is unique and a lot depends on the nature and location of the individual case. Fundamentally, having the right systems and processes in place will help.
As stated previously, reporting is also a challenge because systems and processes need to be set up from the beginning and there is no “one-size-fits all approach” and customers or projects have different reporting requirements. In Curtis Island, there was a lot of reporting required due to the expectations of governments to manage the social impact of the project.
People want to understand how projects benefit their community and Mel advises that you have all the systems in place to capture all the data possible, which should include elements like credit card purchases for accommodation expenses and local wages, all of which add to the multiplier effect. When this was done for Curtis sland they found that $1.5bn was paid in local wages, a figure that Bechtel could share with the community leadership to help them become advocates for the project, strengthening the social license to operate.
Data collection is also only as good as what is put in, so selecting the right metrics is crucial as you don’t want to make the process odious for all that need to input the figures.
Jeff - who in his capacity at EWB’s Mining Shared Value program has done a lot of research into how the top 40 companies in the world report on local content - mentions that this is an important element of your local content strategy because “you can’t manage what you don’t measure.” Jeff highlights two important elements in Local Content Reporting; 1. You need an internal management system that allows you to track spending and define where it is going i.e. whether it is local or wider and 2. You need to work on the external front, particularly on being upfront about what you’re spending on empowering others to make decisions and helping them to understand your goals. e.g. in a mining cluster of 5 mines, all parties could be doing supplier development programmes separately whereas this would provide a better opportunity to combine their efforts into one program.
Then there are the challenges caused by reduced commodity prices – companies know that local content will save them money in the long term, but not immediately, which causes problems with balancing long and short term company objectives. Furthermore, a big challenge currently is satisfying increasing LCRs whilst companies are reducing staff.
Jeff suggests that a solution to this issue is to weather the storm, because suppliers going under will cost you in the long term and you will have to draw on the skills and resources in the host economy. However, working with multi-stakeholder groups will help you share some of the resources and costs
“This can’t be a company-led process, it needs to be a multi-stakeholder process with shared accountability.”
For more information on the above projects please visit the below links:
A full overview of the Curtis Island projects overview
Mel’s white paper on shifting from stakeholder engagement to stakeholder trust
For more information on sustainability at Bechtel, you can view their sustainability report here
Project commissioned by GIZ to create a standard for local procurement reporting: http://goxi.org/profiles/blogs/creating-a-system-to-standardize-rep...
Reports on how the largest mining companies (globally and Canadian) report on local procurement: http://www.miningsharedvalue.com/publications/
Project to examine the effectiveness of local content regulations in Sub-Saharan Africa, with South Africa and Namibia as case studies http://cirdi.ca/engineers-without-borders-canada-researches-local-p...
Project to examine best practices in local procurement from Aboriginal business in Canada, this post talks about the trip that inspired us to start the research. http://community.businessfightspoverty.org/profiles/blogs/mining-lo...
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