Joint ventures at heart of building up to stand-alone Aboriginal companies

Indigenous businesses are building capacity through joint ventures and are growing on the back of multi-billion dollar contracts from big mining companies.

Major iron ore miners Rio Tinto, BHP Billiton and Fortescue Metals Group have awarded nearly $2 billion in contracts to indigenous businesses and their joint venture partners since 2009.

Rio Tinto alone has signed up to $1 billion in indigenous contracts over the past two years. 

FMG has awarded $450 million in work in the past 12 months and BHP Billiton has assigned $400 million in contracts over the past three years.

With indigenous contracting built into many of the mining majors’ Reconciliation Action Plans and indigenous engagement strategies, huge opportunities abound in the north-west for indigenous businesses such as Ngarda Civil and Mining and Carey Mining.

The miners require contractors to have a certain level of capacity and, with many indigenous businesses still growing, joint ventures are often the best option for indigenous businesses to win high-profile work and to build their capacity.

For non-indigenous businesses, forming a joint venture with indigenous players in the market is almost obligatory if they want to secure contracts with the likes of FMG, which insists its contractors have indigenous employment targets and engage with indigenous contractors.

Many modern native title land-use agreements stipulate business opportunities should flow to local indigenous businesses from mining work on their land.

FMG places emphasis on awarding contracts to indigenous businesses to shift the focus from what its founder, Andrew Forrest, refers to as mining welfare – native title payments.

FMG set a target last year to award $1 billion in indigenous contracts by June 2013. It has set minimum 20 per cent Aboriginal employment standards for all its contractors at its Solomon operation in the Pilbara and is pushing its contractors to engage with indigenous contractors.

“Fortescue is very big on targets and we drive a lot of it through our contractors,” FMG Aboriginal business centre manager Heath Nelson told a recent WA Business News boardroom forum.

“When a contractor comes to do work for us, they know they have to employ Aboriginal people and they have to subcontract with Aboriginal businesses.”

Other industry insiders at the forum, including BHP Billiton vice president health, safety environment and community Carl Binning and Azure Capital director and founder of indigenous contracting business Indigenous Construction Resource Group Clinton Wolf, maintained that joint ventures were the best way for an indigenous business to build capacity and competency.

Most of the contracts coming out from BHP Billiton were large and too much to chew on for indigenous businesses, most of which were 10 years old or younger, and Mr Binning said joint ventures offered a strategy to deal with the issue.

“We have indigenous contractors at various stages of maturity. The worst thing you could do is give someone a job that they are not capable of doing,” Mr Binning said.

“Building a deep understanding of the actual demonstrated capability of any business, understanding what the aspiration of that business is and then ensuring the next job stretches that capability towards what they want to become, whilst at the same time benchmarking to ensure we are going to get a successful outcome is key.  Most of the successful contractors are seeking to stretch themselves to the next level. That is when we will still play a proactive role.”

Some indigenous contractors like Ngarda are more than 10 years old and have grown into significant businesses. 

Ngarda turned over more than $120 million in the 2010-11 financial year. In 2008 it secured the largest contract awarded to an indigenous contractor in Western Australia, the $300 million BHP Billiton Yarrie iron ore mine contract.

Indigenous contractor Gumala Enterprises has used joint ventures as a strategy to build its capacity by leveraging off its joint venture partners, Georgiou Group and DVG Group. It is developing a light vehicle maintenance workshop in Tom Price with DVG.

Gumala Enterprises general manager Daryl Smith told WA Business News his strategy since being in the role has been to grow the business under the 70-30 joint venture arrangement it has with Georgiou Group.

The partnership is on to its third contract with Rio Tinto, the construction of a tailings dam in Pannwonica worth $37 million.

Mr Smith said that, as Gumala expanded its expertise, it would look to remodel the joint venture to a 50-50 shareholding.

The business currently has $18 million work in its own right and has the capability and risk profile to take on jobs worth $10 million. It takes on jobs worth between $10 million and $50 million on a joint venture basis.

In 12 months, Mr Smith plans for the business to be taking on jobs in its own right worth $20 million. Eventually, it would like to win contracts with its joint venture partners worth between $50 million and $100 million.

“For us to get the capability, we need to increase our risk exposure to take on larger jobs,” Mr Smith said.

“To do that as a small company is highly risky, so we go into joint ventures, which allow us to lift our capability by being able to attract the right resource. 

“It allows us to increase our balance sheet, which allows us to take on more risk and the next year we have the capability to develop to larger projects.”

Georgiou Group set a target for indigenous business engagement in 2010 and the company’s engineering and risk executive officer, John Galvin, told the WA Business News forum the key to building capability in indigenous business was continuity of work. “There has got to be a continuity of opportunity for these businesses so they keep growing,” Mr Galvin said.

“We are now on our third job with Rio Tinto … and they are really keen to assist the joint venture and assist Gumala to increase their capability and bench strength.”

Three quarters of indigenous company Pilbara Logistics’ work is stand alone, while 25 per cent is in joint ventures with Cimeco and ToxFree (see NRW-Eastern Guruma top JV).

Founder Geoff Stocker said the joint venture with Cimeco had provided invaluable experience in construction and enabled the company to develop technical and management skills.

“Our JV with ToxFree has also strengthened our business opportunities,” Mr Stocker said.

“Like PLWA Group, ToxFree endeavours to provide opportunities for local business and people. This has afforded PWLA Group with a strong reputation of being a community focused company, which is often an essential requirement of companies seeking contract services within the Pilbara.” 

Clinton Wolf was one of the co-founders of relative newcomer Indigenous Construction Resource Group, an indigenous business that partners with subcontractors and builds capability by improving the back end of operations.

“We observed a lot of indigenous contractors, start-ups who are great at moving dirt, they understand the fundamentals of the earth-moving game but in terms of making sure their invoices are correct, their tax issues are under control, they have bought the right type of equipment, it has been audited before it gets on site, we saw they were struggling,” Mr Wolf said.

ICRG and its subcontractors had won contracts with FMG and Mr Wolf said he had seen marked improvement in capabilities since the company was formed in August 2010.

“They were basically labour hire companies when they got there, to be truthful … they are now bona fide contractors, we have transferred that skill set over,” he said.

FMG and Rio Tinto both define an Aboriginal business as one which is at least 25 per cent indigenous owned. Employment of indigenous people is also a key factor.

“If you are an Aboriginal contractor, you have to come with Aboriginal employees. We can’t have an Aboriginal business with white fellas driving the trucks,” FMG’s Mr Nelson said.

Mr Binning warned that capacity building of indigenous employees needed to grow as indigenous businesses evolved.

“We are probably not seeing enough progress with indigenous people coming through into key trades, supervisory and management positions,” he said. “It is the process through which capability is built in companies and contractors.”

The federal government has funding bodies that support the training and development of a skilled indigenous workforce but Mr Wolf said red tape surrounding funding should be removed so mining companies could access funds and subsidise the training of indigenous employees and subcontractors.

Meeting corporate social responsibility standards through indigenous contracting is a factor in why major companies such as BHP Billiton are pushing to increase indigenous contracting.

“The thing that is a little unusual in indigenous contracting, which requires extra effort in a big company, is a small start-up indigenous business is not a business that we would otherwise necessarily support,” Mr Binning said.

Paul Flatau, director of the University of WA’s Centre for Social Impact, said there were five elements to why indigenous business worked better than employment as an empowerment tool.

“It is about mentoring and role models, value congruence in the organisation between the owners and employees, the organisational values are similar to the individual values, there is a greater connection to community and the direct wealth creation that goes beyond the capacity of simple employment and putting back into communities,” Mr Flatau said.

But indigenous businesses must not bank on their ethnicity as a ticket to ride, according to those at the forum.

“You have got to portray yourself first and foremost as competent, safe, productive and reliable,” Mr Wolf said.

“You have to tick those boxes at the top, you tick them and you start being seen in a different light.

“If you go around forever and a day saying because we are indigenous we are entitled to a job, the day you find you are not indispensable you see yourself in a different light.

“What we have now is two layers of welfare – a government welfare layer and a mining welfare layer. As long as you are getting things on a platter all the time there is not much incentive to get up and make a go of it yourself.

“Let’s be brutally honest about this, if you are indigenous and living in the Pilbara, you are the most employable person in Australia.”

Mr Flatau said WA’s Pilbara region set an example for the rest of the country in indigenous contracting.

“You are looking at a very large amount of money going through indigenous businesses. When we looked at that experience in the Pilbara and compared it with the rest of Australia, there is no comparison,” he said.

“We would like to see the Pilbara experience replicated around cities and regions in Western Australia.”

Mr Nelson pointed to examples of contracts across FMG’s business to show indigenous businesses were active in all sectors.

“It is not just in the Pilbara. It is not just mining contracts,” he said.

“We are now using a fibre-optics Aboriginal business in northern Queensland, we have a printing agency over in Adelaide with Aboriginal owners doing our printing … it is not just mining operations, it is getting people to realise there are Aboriginal businesses across all sectors.”