Kakania is a landlocked country in the developing world. Diotima is a traditional fishing village located close to Kakania’s biggest lake inhabited by 50 families; their cattle and, other livestock. The locals are content with their lot fishing and growing enough cereal, vegetables and fruit to eat and, raise their children. The cattle are social assets – which means that they are valued for status; dowries and to honour the dead at funeral banquets. The village is isolated – though one enterprising woman has purchased a mobile phone and makes it her business to store address books for each villager; coordinate remittances being sent from elsewhere and, pull together the needs of the community to be purchased in the nearest town a few miles away every week. Others take their produce to the Northern road close by and set up their charcoal; tomatoes and sweet potatoes to sell to trucks and cars as they pass by on their way to the capital. It has been a tough year.
The skies over Diotima have been dark for days, tantalising farmers with hints of rain. But the dark clouds are little consolation to locals whose paddy crop has been ruined already by the withering heat. One local farmer borrowed from the money lender to buy diesel to fuel machines to pump water into his fields but the water was hot and evaporated quickly.
One day, a Minister arrived with some Big Men and explained that they would look for oil and, if they found it everyone would be happy. Soon enough they ask the community to meet with them and the Elders are unhappy with the tales on the big screens at the Public meetings. The Big men have found something close by the landing stage of Diotima’s fishing community. There are BIG numbers and there are smiling faces and they have been given baseball caps but one Elder remembers bananas.
Years ago, a BIG Corporation had come to buy bananas. At first, they promised the earth and things were fine but slowly and then very quickly hope evaporated. The Big Men grew tired of a place that they saw as pre-historic and tribal. Land was held as a community and, cattle viewed as a social rather than a productive asset. What food they grew was done to meet their immediate needs and not, to sell on in other markets. One day, the Big Men came in their suits and said that they were leaving. Somewhere far away there was a place that they could buy bananas for less than we could survive on. We were left with tonnes of them which we tried to sell at the side of the big road.
And another Elder tells tales of men from the East who came like goats to take the bounty from the mountains and left behind them scrub, rocks and sand. One BIG man rode around in a BIG car until the petrol ran dry. The Big Men from the Oil Exploration Company Qwerty have not gone away. What is to be done?
Kakania does not exist. In fact, it is the name of the fictional country in Robert Musil’s novel The man without qualities. However, Kakania strikes a chord; Diotima is not unusual and, Qwerty can generate mutual benefits or, focus on extraction and adios.
As cheap oil and gas dries up, energy is located in ever more remote regions of the world. Connectivity is poor or non-existent and the local population has done just enough to get by – for generations. Suddenly, Corporations have to spend more to reach the prize. For example, the effort to develop Brazil’s offshore oil fields has cost over US$ 1 trillion – the largest investment programme in the history of mankind costing more than putting a man on the moon. But why should Diotima believe in oil?
These days, it is not enough to extract oil, gas or minerals from some remote region or another and move the raw material to another country to add value. Increasingly, the countries with the resources understand the value of what they have and, want a higher price or, to use an equitable share of the proceeds to invest in the local economy to add value in country and diversify the industrial base. Instead of mining bauxite; rushing it to a port and away to be smelted elsewhere or, drilling for oil only to shift to the developed world as soon as possible – countries see the opportunity to build a diversified economy and underpin inclusive and sustainable growth. Fossil fuels are finite so, the proceeds should reward the explorers with a favourable ROI and, ensure that an equitable amount is available to the local community to invest in the livelihoods and prospects of future generations.
When oil was discovered off Ghana Kofi Annan, the Ghanan ex Secretary General of the UN put it bluntly: “Ghana can choose to be Norway or Nigeria.” Norway has set up a sovereign wealth fund and invests in the long term. At the other end of the scale he could have used Angola. After a Civil conflict that started in 1975 and ended only ten years ago, the country’s considerable resources were either destroyed or, sequestered by powerful vested interests whilst the majority population looked on in penury.
Oil has been the trigger for a bonanza that has made Angola the third richest economy south of the Sahara after South Africa and Nigeria and high crude oil prices have delivered an annual 11 per cent average growth rate from 2003 to now but, the industry breeds greed and corruption that has crowded out and choked other sectors that would balance the economy and deliver mass employment such as agriculture and manufacturing. Oil may provide 97% of export revenue and 75% of government income but it employs just 1% of the population.
Angola was once a significant manufacturer and had unused arable land the size of Belgium but now imports 70% of the goods it consumes. The position on human capital is alarming. One in three over 15s is unable to read or write, three fifths of the population has no access to electricity and only one in three has a proper supply of drinking water and sanitation. Angola is dominated by oil and vulnerable to any shift in price or, a slowdown in China, its biggest customer. A recent FT Report highlighted the key issues for Angola: “It remains an unbalanced economy, suffering from a dire skills shortage, deficient services, lack of entrepreneurial capacity and difficult private-sector access to finance. Notorious corruption and opaque public management keep the country well down the rankings as a place to do business.”
Then, in the far more stable Zambia, there has been the conduct of investor companies like the Chinese at the Collum Mine at Sinazeze which has become a byword for horrendous labour relations; poor pay and a bad safety record. Recently, a Chinese manager was crushed to death in a labour dispute that got out of hand and this has triggered the need to contain a more widespread reaction against a perceived Chinese management style that pays local context little time and effort. All of this raises another major point on local content – managing expectations AND perceptions. This week Zhou Yuxiao, the Chinese Ambassador in Zambia, was moved to make it plain that China should not be blamed for the problems facing the Zambian mining industry. Ambassador Zhou said Chinese forms only mined 5.2% of total copper production – which is the mainstay of the Zambian economy. “Zambia’s Copper industry is over 100 years old but Chinese mining companies have been here for only five. So if people think that the mines are not benefiting the local people as much as it should, the blame should not be put on China. If we have to be blamed then, concentrate on the five per cent! I want to give the picture straight.” (Zambia Post, 15/08/12) There is a message in this response that anyone involved in local content should note.
A bad relationship is good for nobody but, local content is no magic bullet. Forcing a percentage of activity leads nowhere when the capacity to absorb investment and work the projects does not exist. For example, as cheap oil declines and fossil fuels are being discovered in ever more remote locations, exploration companies are finding themselves with no infrastructure to plug into and no local community capable of dealing with the sudden upsurge in local economic activity.
Fundamentally, local content operates way beyond the financial bottom line and is more focussed on the triple bottom line of economic; social and environmental sustainability over the long term. In other words, financial benefits have to be distributed in such a way that social impacts are positive; environmental impacts are mitigated and, that benefits are sustainable. This means:
- More than CSR. Local content has to work towards delivering goods and services to the standards set by the extraction services themselves. These projects work under time pressures and local content will be supplying the core business with goods and services that respond to these objectives and expectations.
- Transparency. Before anything is done a clear business model and modus operandi needs to be worked out and agreed with stakeholders. This has to be rooted in firm numbers and, a commitment to transparency.
- SMEs & Micro firms. Local content needs businesses, SMEs and MSMEs to trade with. There has to be a framework to register a company efficiently and then, every effort has to be made to educate people that any business is separate from themselves. Watch for the notion that because the business is theirs that they can do anything they want. This has to be addressed. So too the idea that buying cars and other items on the business means that these are assets for the business. This is a potential minefield when the local culture has not gone beyond the informal.
- Formal business models. The Majority world is predominantly informal and this is where most jobs are created. There is no point in treating the informal sector like bars in the Prohibition era in the USA. This means working towards formal relationships but recognising the starting point.
- Work assignments and tendering. Moving to web based auctions may be the way forward but, in the short run, micro firms will have to be taught how to cost a project and how to monitor cash flow. A basic business skills package should be high on the agenda.
- Payments. Every effort needs to be made to understand that few if any people and most micro firms will work with cash and have no recourse to formal banking. In fact, there will not be a bank branch within miles! Mobile phones are the tool that will emerge to be the way forward.
- Measures. It is customary to use the term KPI (Key Performance Indicators); better to use KVIs (Key Value Indicators) since this is what this will be about – shared value.
- Core supply chains and local content. Minerals, oil and gas all have their core upstream; midstream and downstream supply chains. These are well developed and, like a Formula 1 team, will operate to International standards. There may be technical challenges triggered by the remoteness of the location but the bigger challenge may come from the peripheral or collateral supply chains that are necessary for the project to build sustainable momentum.
- Collateral supply chains, services and local content. If they strike oil, gas or minerals, specialist exploration teams will morph into bigger communities of skilled operators and, support trades and services. For example, oil and minerals have been found in landlocked places like Zambia; Uganda; on the Kenya / Ethiopia border and throughout South America. These areas have been home to subsistence farmers or fishing communities and there has never been a need to generate a surplus to take to markets away from the immediate surrounds. Suddenly, the agenda will shift to sourcing local fruit, vegetables, meat, poultry and other services for a massively expanded migrant community. Initially, these needs will be shipped in but soon enough this will impact local livelihoods as local transport – such that it is – will all be focussed on the project and the high prices that it may pay. If this is not put into perspective, inflation will hit the livelihoods of the local community and the social fabric – and the project – will be put under intolerable strain. These days, shareholders will monitor this position with interest.
- Skills Capacity Building Programme. By some estimates, the Dubai workforce is 97% migrant and this is not a scenario that will work for any projects working in remote areas. Back to Kakania. There needs to be a clear Skills approach. As Neil Watson or Consulting firm Archomai makes plain: “There needs to be clarity on the core and support skills needed and, this will include agriculture as well as engineering skills. Go wider – a remote project will need everything from mobile phone technicians and key cutters to all levels of book-keeping.” Neil goes on to highlight the use of simulation and simulator technologies for remote learning, mentoring and trainer support.
- Local capacity. Over time, the project team will have to develop a local content strategy aimed at striking a delicate balance of mutual benefits. This is a significant shift in more ways than one. Up to now, most of the Aid programmes working with indigenous communities have been focussed on food security and then export capability – going where the margins are. Suddenly, in several developing markets with high population growth and rapid urbanisation, the opportunity is to scale up for LOCAL expansion. And this means building a more comprehensive local network than is needed when the objective of the exercise is to harvest and export asap. This cannot be underestimated.
- Innovation. This could be the opportunity to test out a fresh look on new ideas; not just for products but for process as well, how to make things happen. I was in Norway recently and one senior Oil executive said to me that the days of offshore rigs had to be numbered. Research is being done to locate rigs on the sea bed and manage everything remotely. The main reason is the huge costs of keeping a rig staffed in the middle of nowhere. The same basic principles need to be examined on any supply chains that work local content. There may well be adaptable, affordable and far more accessible solutions than are in the model now. Some call this jugaad or frugal innovation others emphasise appropriate technology. For example, take a look at Zambikes – known for their bike made from bamboo but building real momentum on their Zamcart that is being used for all sorts of product (and people) movements.There are many examples, eChoupal in India has been developed to aggregate supply and demand in remote rural areas in India. This ITC initiative sets up a terminal in a village and locals are trained to use this for information; placing orders etc. Initially, this was used for agricultural needs but companies like TVS – who manufacture motorbikes – sold 37,000 units over eChoupal in 2010. Mobile phone applications have transformed this aspect of local content and will continue to develop further. eCow in Kenya ha s generated significant results with small farmers – increasing the yield of dariy cattle; the mortality rate for calves and, as such growing the asset of the local community. And then, there are other essentials
- Sustainability. This means developing local capacity well into the future and this means diversification as well as a scale up of the ability to meet the current projects needs. It is the challenge in Nigeria and Angola – ensure that oil monies are spent on other industries. It is the challenge in Russia too – where the oil price crowds out initiatives in other industries.
Local content is a two way street and the benefits to the International player are real and far beyond the scope of a CSR (Corporate Social Responsibility) Programme. For example, several products have been developed in these remote areas and reverse innovation is now finding its way back to the developed world. Expect more and more of this to happen! Even our fictional location gives us one of the major innovation opportunities – landlocked logistics. Kakania is a landlocked country, Diotima a remote location and remoteness matters because it increases operational and market access costs. Logistics costs for a landlocked African country (there are 15 of them) can be up to 40% higher than for a coastal one. These factors are compounded if the nearest port – and Diotima is over 1,000 kms from one – is small; has no experience with major bulk volumes, containers or, project cargoes and is not located on established shipping lanes. All of these factors impact the bottom line.
As Dr Kenneth Kaunda, the then President of Zambia, stated on August 11th 1969: “In future, we shall welcome foreign capital because we need foreign capital in considerable amounts. All we ask of our investors is the understanding that we welcome them as participants and not as controllers of our economic development process.” Local content is an inclusive agenda.