No easy answer on local content

THE recent approval of the giant Gorgon liquefied natural gas (LNG) project has sparked increased discussion about the amount of work that flows to Australian industry from big resources developments.

Somewhat perversely, it has also raised concern about the shortage of skilled labour that is likely to emerge, perhaps as early as 2010, when a succession of gas, iron ore and infrastructure projects coincide.

So on the one hand, there is concern that local businesses will not get enough work from the big projects.

On the other, there is concern that local businesses will struggle to complete the work that is available.

Add to that the prospect of rising land prices, rising rentals, in fact rising costs across the board, and we will be very quickly back to the situation facing the state in 2007 and early 2008.

Remember all the talk about the "the price of the boom", how hard it was to manage rapidly rising costs, the pressure to keep up with fast-growing work volumes?

No wonder premier Colin Barnett refuses to use the word 'boom'. He insists Western Australia is going to experience sustained and manageable growth.

Unfortunately he has failed to explain how he is going to achieve that commendable goal.

The debate over local content, like many issues, is often muddied by statistics.

The reality is that some projects, like iron ore developments, involve a large amount of on-the-ground contracting, to build railways, wharves and mining pits. They typically have about 75 per cent local content.

Other projects, like LNG plants, require a large amount of complex capital equipment that can't be built in Australia, or would be prohibitively expensive.

The high point for local content in the LNG industry was the North West Shelf venture's train 4 expansion, which reached 65 per cent local content.

More recent projects like train 5 and Pluto have much lower levels, for two main reasons.

The process plant has been built in modules in Asian fabrication yards rather than 'stick built' on-site - that is a trend that won't change - and much of the engineering has been done in places like London and Houston.

The big question is, what can Chevron achieve with its Gorgon project?

With the best will in the world, it will struggle to get to more than 50 per cent local content during the construction phase.

The scale of the project far exceeds anything done before, and therefore on its own, it would stretch the capability of local industry, whether engineers, fabrication workshops or site welders.

Compounding the challenge will be the prospect of competing for labour and equipment with several other big gas projects, such as Pluto phase 2 and Ichthys in Darwin, as well as various iron ore, infrastructure and other projects.

Many people shake their heads in dismay when they see large items of capital equipment brought in from overseas. Why can't we build it here, they ask.

That often leads to calls for a more interventionist, even prescriptive policy response, such as mandating local content requirements.

Instead we should have a frank assessment of the pros and cons of operating in a globalised economy with low trade barriers.

The upside is that Australian companies are able to export their skills around the world.

Perth is a world leader in mining software, for instance, and process engineers from Perth have designed and built dozens of gold mines in Africa, South America and elsewhere.

The best way to maximise these opportunities is to ensure Australia has an efficient, productive business sector.

That means having things like a flexible labour market, efficient infrastructure, a stable investment climate, and responsive training organisations.

Added to that can be hands-on programs, like supporting the Industry Capability Network, which seeks to marry local suppliers with the needs of project developers.

But there is no silver bullet that government can wheel out.

There is also an ethical dimension to this. All companies talk about their commitment to maximising local content. The onus rests on project developers to ensure they genuinely seek to achieve this goal.