Figures giving the ‘value’ of investment in major projects are misleading, given the amount of ‘offshoring’ under way.
EVERY few months we see the release of a report showing the total value of expected investment on major resource and infrastructure projects in Western Australia.
These reports are widely quoted by politicians and market analysts, usually to underpin bullish economic forecasts.
So it was last week, when Deloitte Access Economics released its latest Investment Monitor.
It estimated that projects worth $107 billion were either under way or committed, and a further $157 billion may be invested in projects under consideration.
I don’t have any issues with the integrity of the data, but we need to look carefully at the nature of these projects and ask one very important question – how much of this money will actually be spent in WA?
The short answer is that a declining proportion gets spent here, as project developers opt for offshore suppliers.
This is not a small shift; we are talking about tens of billions of dollars, spending on a scale that surely has a profound impact on the state’s economic prospects.
The amount of spending in WA varies with the type of project. This can be illustrated by looking at some of the major sectors.
Iron ore projects, as a rule, entail a large amount of local spending. This is because iron ore projects involve tasks such as digging pits, building railway lines and constructing wharves. By definition, most of this civil engineering work has to occur on site.
Hematite iron ore mines, which historically have dominated the industry in WA, involve 90 per cent local content.
The new generation of magnetite projects, like CP Mining’s Sino Iron project south of Dampier and Gindalbie’s Karara project in the Mid West, are a different proposition.
They include the construction of large processing plants, plus power stations, and in some cases desalination plants, much of which is designed and built offshore.
The Chinese investors in these projects have tended to get the engineering work done in China rather than locally, and they have added to a trend for items such as ore wagons to be purchased in China.
As a result, the local content on these projects is lower than the traditional figure.
The real game changer is the liquefied natural gas (LNG) sector.
When the North West Shelf venture completed its train 4 expansion, about 70 per cent of spending was in WA. That’s a good number for an LNG project.
For Woodside’s $13 billion Pluto LNG project, the local content will be much lower, at about 55 per cent.
The Chevron-operated Gorgon project is lower again, with an estimated local content of about 45 per cent.
That means out of total capital spending of $43 billion, a full $23 billion will be spent offshore.
This outcome does not always signal a lack of intent. The scale of these projects, the tight labour supply and limited capacity in the local market, and the specialist equipment needed, can make it difficult to achieve high local content.
The planned development of floating LNG platforms, starting with Shell’s $12 billion Prelude project, changes the numbers again.
Shell has not released local content data for Prelude, but the nature of the project – construction of an LNG plant on a giant ship – makes it inevitable that most of the work will be done offshore.
When pressed on this point, Shell says it will be investing in local training for operational staff.
That’s good, but it effectively confirms that most of the capex will be conducted offshore.
Let’s assume, probably generously, that 25 per cent of the total capex is spent locally. That means local investment for Prelude will actually be closer to $3 billion than $12 billion.
These issues are not confined to resources projects. Power stations, for instance, tend to import turbines and other equipment from international suppliers.
In all, these trends mean that a $107 billion investment boom in WA projects does not mean that $107 billion will actually be spent in WA. Far from it.