25/02/2009 - 22:00

Local content an emerging issue

25/02/2009 - 22:00


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Local suppliers need to be given a fair chance to compete.

Local content an emerging issue

THE amount of Australian industry content on major resource and infrastructure projects is likely to re-emerge as a policy issue this year, and so it should.

There has been little discussion about local content in recent years because the economic boom meant that virtually every business in every industry sector has been busy, even though more and more project work has been sent offshore.

Engineering, designing, drafting and manufacturing activities have all been sent overseas.

The downturn, combined with the closure of some resources projects and the slowdown in new projects, suddenly means that local businesses will be looking a lot harder for work.

And local firms will be a lot less forgiving if work is sent offshore when it could be performed locally.

Many business people I have spoken to about this topic bemoan the widespread use of Chinese and South Korean capital equipment on Australian projects.

Dig a little deeper and people also acknowledge that project developers, whether in the private sector or in government, cannot be expected to subsidise local suppliers that are not competitive.

The challenge for governments and responsible corporate citizens is to strike the appropriate balance.

That doesn't necessarily mean a crude policy response, such as mandating a certain percentage of Australian content. But it may mean adopting procurement policies that genuinely give local suppliers a fair chance of winning work.

The task facing local suppliers trying to win work on big projects has been made more difficult in recent times.

Perhaps the most significant factor is the increased use of modular construction. Liquefied natural gas plants, for instance, used to be built on site, in a process called stick build.

Skilled labour shortages and rapidly escalating construction costs, particularly in remote locations such as the Pilbara, have led LNG project developers to transfer work to construction yards in Asia.

This approach also ameliorated perceived concerns about industrial disruption in Australia.

The North West Shelf Venture's train 5 project, built earlier this decade, led the shift towards modular construction.

Woodside's Pluto project is taking modular construction to a new level; the LNG plant has been broken down into 261 modules, which will be fabricated in Asian construction yards and transported on barges to the Burrup Peninsula for assembly.

The complexity and capital-intensive nature of LNG plants lends itself to modular construction, yet the same concepts are being applied increasingly in other sectors.

Iron ore projects traditionally had a very high (80 to 90 per cent) local content level but that figure is falling.

Engineering and design work is also moving overseas.

This partly reflects general trends like the shortage of skilled engineers and rising labour costs in Perth in recent years.

It also reflects specific factors, like the fact that London and Yokohama have a depth of LNG engineering expertise Perth will never match.

Hence, international engineering company FosterWheeler did most of the design work for train 5 and Pluto in the UK, while Inpex's Ichthys plant is being designed in Yokohama.

This would not have been feasible 10 years ago but technology is opening up new possibilities, even in sectors such as gold where Australian engineers are world leaders.

Newmont's Boddington gold project is a case in point. Engineering firm Aker Kvaerner did most of the detailed design work for the process plant at its office in Santiago, Chile.

Increasing Chinese investment in the iron ore sector is accelerating this trend. A lot of the engineering work on Gindalbie Metals' Karara project, for instance, has occurred in China.

Transferring engineering work overseas is one thing. It becomes even more significant when the procurement function is also transferred, because that puts another hurdle in the way of local suppliers.

Project developers need to ensure they walk the talk. They all profess to give local suppliers a full, fair and reasonable opportunity to compete.

Whether that is really the case can depend on detailed matters like whether contract packages are of a scale that local suppliers can realistically manage.

Local content is about more than the construction phase. It is also about operations and maintenance over 20 or 30 years, which can create even bigger opportunities.


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