Are your contractors managing the social impacts of their activities?
Aligning social performance roles and responsibilities between project operators and their contractors is tough at the best of times. Project investors and operators are under increasing pressure to manage costs, and projects now deemed ‘uneconomic’ are collecting dust on a rather large shelf at headquarters. On the other side, contractors are facing fierce competition for the surviving projects with many squeezing their already tight profit margins just to keep a foot in the game.
Every day there seems to be another example of the challenges of managing the social performance issues associated with large capital infrastructure projects. Many project operators have to navigate the complex dynamics of communities impacted by such projects, labour disputes, issues of human rights and the use of increasingly precious water, land and other natural resources.
In addition and increasingly, host Governments are enforcing more stringent local content requirements on project operators in an attempt to capture greater socio-economic benefits. However, not all local suppliers have the capabilities of large international contractors and so the challenge becomes balancing local content requirements with high health, safety, environment and social standards. The unfortunate truth is that a project operator will only ever be as good as the poorest performing contractor in their supply chain.
The business case for a more cohesive approach between operators and contractors has been well documented. A 2011 executive briefing entitled ‘Shared Value, Share Responsibility’ by the International Institute on Environment and Development (IIED) clearly articulates both the challenges and actions required to improve performance in this area. IIED looked to the 2010 Macondo incident in the Gulf of Mexico to demonstrate the enormous impacts which poor contractor management and supply chain coordination can have.
Whilst some might continue to argue that alignment on social performance issues between project operators and contractors is a ‘nice to have’, I believe it is essential. After all, owners can ill afford projects that suffer cost and schedule over runs (or stop completely) as a result of community unrest – particularly when margins are so tight to begin with. Getting it right from the outset has never been more important.
As a colleague recently reminded me, ‘social performance management is not core business, but it must be core to the business’. I believe this sentiment also lends itself to the supply chain. Just as a contractor’s health and safety performance is fundamental to a successful operation – whether drilling an exploration well, building a process facility or shopping center, or constructing a road – so too is their ability to understand and manage the social impacts and opportunities which come with that activity.
At Kina we understand that each operation and project will bring unique challenges that require unique solutions. There is no ‘one size fits all’ approach that will bring about alignment and cohesiveness, but we offer a range of tools that can help both project operators and contractors better manage social challenges. We help our clients prepare for and manage the social risks inherent in their supply chains but we also passionately believe in building capacity within the supply chain – helping local suppliers enhance their social performance capabilities. This is good business and ultimately can only lead to better outcomes for project operators, contractors and host communities.
Trina Fahey, Partner