Insight & Analysis
Four Strategies for Local Content Success
15 February, 2015
Local content has emerged as one of the most pressing issues facing business in emerging markets.
It has the best local value to investment ratio (ROI) and even when done poorly it can have significant positive impacts.
Effective local content strategies have two focus areas that are common across industries and geographies. These are employment and procurement.
Get them right and your project has the foundation for a strong and resilient social license. Local employment and procurement can also be a key component of your project’s overall economic viability.
Get them wrong and your project will struggle with social and community issues and, quite often, overall project viability.
Developing local employment and local procurement is one of the best leveraged CSR investments that a company can make. Think about it.
The jobs have to be filled. The goods and services have to be procured. If they aren’t procured locally then very little of the money from them will circulate in the local economy.
If they are procured locally then virtually all of the money circulates in the local economy and has a significant multiplier effect.
Even if local content creates additional costs the socio-economic impact derived from those extra costs represent a significant return on that investment because they are leveraged by the overall employment and procurement spending.
And, often there aren’t extra costs or the additional costs are front-loaded and the benefits last over the life of the project.
If a project isn’t maximizing local employment and procurement then it will be bringing in more outsiders. This costs extra and can increase community tension beyond the lost employment and contracts. (Think of an influx of single young men coming to work at a project site and the impact on local families and communities).
Successful local content strategies can not only result in strong local relationships, they can also help with a project and company’s relationship with local and national governments and regulators as well as with developmental and advocacy NGOs.
But, success is not easy
Common constraints that must be overcome to have success with local content include:
- Projects are often based in remote locations with little or no experience with industrial employment or even salaried employment of any kind.
- Levels of literacy are low and household economies are often subsistence based.
- There is little or no effective infrastructure to provide training and support to assist potential workers with the transition to industrial employment.
- Local businesses and prospective entrepreneurs lack the skills and experience to be effective providers of goods and services. This includes both technical skills and business management skills.
- There are no economic vehicles in the local economy that can enable effective participation in the larger contracts and opportunities.
Locally owned businesses lack the financial, operational and management capacity to compete for larger contracts, even with extensive support and assistance from the project/company.
The bulk of the overall value of contracts for goods and services cannot be broken down to a size that can be digested by local businesses and entrepreneurs.
This means that by default the local economy is effectively prohibited from participating in the lion’s share of opportunities other than as sub-contractors.
- Programs to facilitate local content development are under-resourced and focus on short-term impacts rather than the structural issues that inhibit optimization of local content.
Below are four strategies that can help achieve local content success.
They probably won’t all work all of the time. And some may have no applicability to your particular project or venture.
But, you may find some useful, or they may stimulate you to think of other strategies and approaches for optimizing local content.
1. Think Cap Ex when budgeting
Developing and implementing successful local content programs isn’t cheap. Getting to success often means overcoming significant gaps in skills and capacity, and sometimes requires development of organizational and institutional infrastructure. This can be costly and time-consuming, yet can provide valuable long-term results.
Investments in local content development pay back over the life of the project. Yet most budgets treat them as operating expenses, not capital expenses. Why?
In my experience it is mostly because nobody has challenged finance and accounting on how they are treated. But, it does make a difference. And it should be treated as a capital expense. The payback is over time, generally over life of project.
When local content development is treated as an operating expense it is generally under-resourced and focused too much on short-term rather than life of project impacts.
There is a strong case to be made for including local content development budgets early on in a project’s overall capital budget. This can provide the resources and the time-frame to make it work effectively and will pay off handsomely over the life of the project.
2. Development Corporations
The scale of most procurement opportunities is simply beyond the financial, operational and organizational capacity of local businesses and economic institutions.
Local businesses are simply unable to scale so as to take advantage of the opportunities the project presents. And, if they were given them they would not have the capacity to manage them effectively.
This was a challenge faced by many Indigenous communities in Canada.
Development of major industries and projects on their traditional lands meant that there were large contracting and business development opportunities available to them. But, their local businesses and economic structures did not have the scale to take advantage of them. The opportunities and benefits went to outside providers.
A development corporation model evolved over time and proved to be very successful at enabling local capacity to bid on major contracts and activities.
In the development corporation model geographic or tribal based populations come together and form for profit development corporations that are collectively owned. They are able to operate at a scale whereby they can engage professional management and be better able to meet the needs of modern industry.
In many cases development corporations would recognize that the scale of the contracting opportunity was so large that they needed to bring in additional operational and financial expertise. This was often accomplished via joint-venturing with firms that could bring the missing pieces to the opportunity and supplement the strategic local content advantage that development corporations had.
Kitsaki Development Corporation – Local Content Success Story
An early example of using a development corporation approach is the Kitsaki Development Corporation, a business development vehicle created by the Lac La Ronge Indian Band in northern Saskatchewan, Canada.
The regulatory structure that was put in place to enable the development of the Uranium industry in northern Saskatchewan sought to facilitate local content development. One of the ways it did this was to put in place a requirement that local content providers be given a specific bid preference.
Kitsaki used this preference, along with a well-executed joint-venture strategy to secure an initial contract. It has used that strategy across a range of focused opportunities and created a venture with annual turnover in the ½ billion dollar range (see details on their website here).
In the mid-1980s the bulk transportation contract was coming up for Key Lake Mine. Kitsaki recognized the opportunity and also recognized that while it had a local content advantage, it did not have operational experience in the bulk transport business.
Kitsaki, which had astute professional management, sought out a partner that could bring the missing pieces to the venture. It partnered with Trimac Transportation, the largest bulk transport firm in North America.
The Jt Venture that was created, Northern Resource Trucking, which was 51% owned by Kitsaki, went on to become the largest bulk transport business in Northern Saskatchewan and today provides services to industry and communities across the region.
Kitsaki used a similar approach to take advantage of other strategic opportunities in the local and regional economy. See more here.
This development corporation and joint venture model has proven very successful for many Indigenous communities and tribal organizations across Canada and the United States.
A key to the sustainable success of development corporations is a strategic approach that leverages local content advantages and meets the needs of industry and other markets, often through partnerships and joint ventures.
An equally important key is effective governance and political management that give the development corporation operational space and keeps it free from political interference and manipulation.
3. Pre-employment training
Advertise for entry level workers at a remote project and you are overwhelmed with applications. And, the process of sifting through them is inefficient, often bringing in poorly suited applicants and leaving better suited ones off the list.
Some applicants find that the structure of industrial employment and its impact on family and life simply doesn’t fit for them. In other cases, immersion in a structured institutional setting can bring out traits that were not evident during the screening and hiring process
Too often the end result is high turnover of employees and frustration on the part of employees, managers and the company.
A well-structured pre-employment training program can address these issues. It can dramatically reduce turnover and provide the broader community with enhanced life-skills and livelihood potential.
It works by establishing a short-term program (typically 6-12 weeks) where a pool of prospective employees are brought into a program that prepares them for industrial employment and helps them to determine if industrial employment is for them.
The program typically consists of a range of components that are directly and indirectly related to the anticipated employment.
They include elements related to the lifestyle transition that often accompanies a move from a subsistence lifestyle to salaried industrial employment. Some of the programming, such as household financial literacy and household economic transition involve spouses and sometimes children.
At the end of the pre-employment training the trainees have a much better sense of what all is involved in industrial employment and whether that is a fit for them and their families.
Pre-employment training gives employers the opportunity to know prospective employees over a much longer time-frame and across broader range of situations.
At the conclusion of the program those deemed the most suitable for industrial employment go into a pre-screened pool that the company can select from when it next needs to hire new workers. This pool can also be made available to contractors and others, helping to improve secondary and tertiary level local content success.
The end result is that those who are hired and brought on board are much more likely to stay and succeed. A big cost saving for the company, big value for the local economy and a big frustration avoider for all!
Even those that are not brought into the pre-screened pool benefit. They have learned new skills and are better positioned to secure other employment or develop alternative livelihoods.
In many cases pre-employment training can be undertaken by more than one project.
4. Invest in education and training institutions
The skills, attitude and expertise gap between where local workers are at and where they need to be can be huge.
Especially when the local content strategy is focused beyond simply bringing in entry level workers and instead has a target of seeing local employees at all levels and across all functions in the organization.
There is a need for effective education and training programs to systematically bridge gaps and help both employees and employers.
While it may seem simpler to either do the training in-house or bring in outside experts to do the training, this can be a short-sighted approach with longer term costs.
Most times there are local polytechnics and other local training institutions. And often they don’t have the capacity to develop and deliver the type of training needed and at the quality level required.
Local training institutions are local content too.
Rather than simply pass by the local institutions in favour of bringing in a qualified institution or instructor, or even doing it in-house, companies should carefully consider investing in developing local training capacity.
This would include facilitating partnerships between local training institutions and international partners who can help them to both develop and deliver effective programming to meet current requirements, and develop the institutional capacity to do so in the future.
While this may be slightly slower and more expensive in the short term, the improved local capacity will pay many dividends, including lower costs later on and an improved local capacity to train people for a range of livelihoods and skills (thus reducing dependency on the dominant industrial employer in a region).
These four strategies are no guarantee of success. Local content is not an easy puzzle to solve. But, following those strategies that can apply effectively to your project can help improve your chances of success, and can make a huge difference for local families and communities and, ultimately, your shareholders.