Local Content: Walk or Talk?

“AUSTRALIA walks the talk on local content,” boasted the Australian High Commissioner to Solomon Islands in December 2022. This followed the launch in October of the “Local Content Strategy” for the flagship Australian aid program to Solomon Islands, known as the Solomon Islands Infrastructure Program (SIIP). So called “local content” is enshrined as one of SIIP’s five guiding principles: “Every SIIP-supported investment must be planned, designed, procured and constructed to optimize local content outcomes”

It's hard to argue with the sentiment that if large infrastructure is being funded, it may as well benefit the Solomon Islands businesses in the short term, as well as being a long-term asset investment. The engineering and construction industry is an obvious beneficiary. But what does ‘local content’ really mean – is it another foreigner’s condescension or does it capture a felt need for Solomon Islanders? Let’s dig deeper to see what it means, what it promises, what’s happened so far and whether it can deliver on expectations.

The land of lost content

It is a common complaint that aid projects come and go and leave nothing behind but a wharf, bridge or road. The term “boomerang aid” was coined to describe this phenomenon. Despite the Australian moniker, it’s not just Australia who have engaged in this – Japan, China,

New Zealand have all been guilty of it. To Solomon Islanders, local content means very much what it sounds like – the inclusion of Solomon Islands nationals, their firms, their products, their knowhow, in the development and delivery of infrastructure. A lot of building and construction work happens across the country, with no need for any foreigners to be involved. Why is it that when foreign donors fund a project, it seems to come with a Breakwater café full of foreigners? In the 1990s, Australian funded projects were legally required to give preferential treatment to Australian companies. It seems that the last decade geopolitical escalation has caused an about-face on this policy, amongst others.

Yet, there are three main reasons why low levels of local content persist:

• Complexity of projects – the perception of complexity pushes donors to trust people/companies that they know

• Accountability for Value for Money – Low appetite for donors to break up large projects into smaller chunks for delivery by local firms

• Pressure from donor-country firms – delivering foreign aid projects is a business model for some companies and they apply pressure for that to continue/increase

And so, the “content” goes to firms from the donor’s country. Granted, market forces and common sense dictate that some local labour, subcontractors and equipment/materials will always be ‘local’. But, the profits are repatriated, along with most of the knowledge.

Going to the local

Efforts have been made under some projects funded by multilateral banks to include ‘local preference’ in the procurement processes. As Solomon Islanders have (rightly) taken more autonomy over the way that aid funding, especially loan funds, are spent in their own country, the push for more overt and reliable local content has increased.

“SIIP Skills Series” is how to develop a GEDSI policy - a key SIIP tender document. Other training is planned in response to future assessments of need. There is a register on the website for local firms who have an interest in partnering with larger regional firms (https://siip.com.sb/industryopportunities/ ). During the tender process, SIIP will use this register to connect local expertise to create “infrastructure partnerships” with the regional firms. Yet, for a flagship aid project spruiking local content, there must be more to it than a few training courses and a register. Indeed, there is.

Enter SIIP. SIIP promises to optimise the local content. How will they deliver this?

There are a few mechanisms in place, each of which is mapped to a stage in the infrastructure lifecycle. These include assessments of contractors/suppliers, capabilities, training needs, training opportunities and existing expertise. As each of the ten or so current SIIP investments are at different stages in their lifecycle, some activities have already commenced. Every two months or so a free skills workshop has been run – the second one rolled out on 1 Feb 2023, addressing contract management. These are intended to improve the ability of local firms to make sense of the contracts they will be asked to sign. The next in this

Joining the bureaucratic dots

As with all good policy implementation, it needs a policy framework. SIIP’s local content policy framework aligns horizontally and triple vertically integrated A, B, C activities that address metrics, targets and actions across 7 key actions, by adopting 12 guiding principles. Simple!

This bureaucratic construct is underpinned by a definitional framework, which defines what SIIP means when they say ‘local content’ (refer Figure 1). This is where the rubber hits the road – the definitional framework sets the ground rules for what will and will not be deemed to constitute the involvement of a local firm. If you don’t meet the criteria, don’t expect any special treatment.

If you do qualify, it’s not a free ride either. There are further obstacles to your firm’s involvement – there’s an investment framework, which will assess the volume of opportunities on any one project, ranking each project as low, medium or high. If it’s ranked low, there’s a low chance of anything but training and cleaning contracts for locals.

If a qualifying local firm can tick all those boxes, the next hurdle is to consider where the firm fits in the project lifecycle (from concept design through to operation/maintenance). Many local firms are owned by nationalised Chinese. Under the definitions of the policy, those firms could still qualify.

The density of this process and the difficulty of a local firm ever deriving any benefit from it, is a symptom of the difficulty of what SIIP has set out to do – legitimise favouritism within a process that is designed and fiercely defended as being impartial.

Gone walkabout

The strategy document is generally optimistic about the local industry. There are capability assessments within the document demonstrating this. Excepting Noro Port, the planned projects are by no stretch complex projects - market buildings, domestic wharves, runway upgrades and a medical clinic (even if some of the specifications are exacting, e.g., Naha Birthing Centre).

It's the perception that there are a lot of barriers to genuine participation that is at odds with the optimism and opportunity. While the training will be appreciated, it’s difficult to see this local content strategy meeting local expectations. Participation levels are unlikely to exceed what market forces would have delivered anyway. Consider what is already developing with new business partnerships, such as the Hatanga-BY Group partnership PT reported in the last issue (PT Magazine, Issue 11, First Nations First).

From local content to collaboration

Local content is a label, and carries political tones which are hard to ignore. To operate beyond this, perhaps a new style of contracting is required – an “alliance” contract, where all contracted parties (client, donor, contractor, designer) share the financial gain (or pain) for the outcome of the project. This would mean that decisions which necessarily involve the trade-off between quality, time and cost would be taken jointly, rather that at one party’s expense. An alliance would enable and empower client-side representatives to assure the quality of product supply and placement, while also feeling the pressure of losses incurred during stand-down time or by any rework to achieve that outcome. It would empower designers to innovate and explore options, knowing that savings in construction time or cost are possible, but also that optioneering takes time and money to develop.

Such a contracting mechanism can enable any savings to be reinvested by the client, either in the project or elsewhere. When a situation develops which may mean the project incurs financial or reputational loss, as these losses are shared, there is a vested interest for everyone to share their knowledge and resources to solve for the best outcome.

The governance and legal liabilities of alliances could be difficult to negotiate, considering international laws, loan financing and various other risks. Alliances are touted as being suitable in a ‘mature’ contracting environment, not for every project or contract. But they are ideal for complex environments, fast tracked projects and projects with overlapping risks. A vehicle such as SIIP would be the ideal platform to test this. How does this relate to local content? If increasing local content is important to the client, then in an alliance, that requirement becomes a project indicator with a financial incentive attached to achieving it. Then the project team holds themselves accountable for delivering on it. It is a very powerful set of incentives and governance model.

Walk or crawl?

Alliances are the gold standard. Yet, within the current realities for SIIP, an approach which engages, plans for and designs projects that are intended to be delivered with local firms, expertise and materials would be a success.

The SIIP lens is an Australian lens. It values intended long-term economic outcomes more highly than ensuring the local industry has a reliable supply of work. That is a mistake. The demand side of the infrastructure market should be supported with a consistent, accessible pipeline of work. This will enable companies to invest for the long term, and in doing so, may well achieve political and economic goals at the same time. Perhaps a more appropriate slogan would be “crawling the talk on local content”. Not very elegant, but then, neither are the opportunities for local industry to date.