Why Incitec Pivot Built a Factory in the US, not Australia
4 September 2017
This opinion article by Incitec Pivot chief executive James Fazzino was published in The Australian Financial Review on 4 September 2017.
With a dramatic sweep of his hand, the then-governor of Louisiana, Bobby Jindal, proudly embraced the numerous manufacturing plants visible from the window of his office.
I will long remember the day that I made an impromptu contact with his office on the way to New Orleans where this obscure Australian company, Incitec Pivot Limited, was considering an $US850 million ($1.08 billion) investment in a world-scale ammonia plant. He cleared his diary to meet with me.
Statistically, there is much to recommend the US as a great place to do business: it is the world's largest economy and second largest manufacturer, with high levels of research, capital investment and productivity. These numbers help explain why the United States has been the largest destination for Australian investment for many years, as confirmed by the recently-released US Studies Centre report on the US-Australia investment relationship. However, numbers alone don't capture what is to me a key attraction for US investment – and an area where Australia could learn significantly: a strong supportive business-friendly culture. As the report details, Australian businesses like us who enter the United States receive a level of welcome that is rarely found in Australia.
More taxpayers, not taxes
Our experience in Louisiana is a testament to this: One of Jindal's initial comments to me about why he was focused on supporting project development particularly stood out: "I'm not about more taxes; I'm about more taxpayers".
This approach extended throughout his administration. It was essential to our project economics that the approvals process was expedited – not the standards lessened – so we could sign a lump-sum construction contract. Louisiana has environmental and regulatory standards the equal, if not higher, than Australia and yet we achieved approval in six months. Meanwhile, the US Studies report details how it took years for a simple retailer like Costco to get the zoning approval to open their first warehouse in Victoria.
The state government agency charged with encouraging business into the state is called Louisiana Economic Development (LED). When we discussed with LED the need to expedite the approval deadlines, the response was that "we won't lower the standards but we can have our people work overtime to ensure that all the documentation achieves the necessary quality … if you pay for the overtime". Of course, we agreed.
With LED, we were never forgotten after we began the process of building our plant. They contacted us regularly asking: "Is there any more that we can do to help further?" That's a business-friendly partner.
This level of commitment to a mutually-beneficial outcome extended to all levels of government from the state to the local.
On time and under budget
The Louisiana project was an outstanding investment for IPL and was recognised as such by an international management consultancy, which benchmarked the project in the top 2 per cent of global construction projects for delivery on time and under budget – and most importantly, with zero lost time injuries.
Sadly for Australia, we looked at a similar development at the same time in New South Wales that did not end up proceeding. Like other case studies of Australian firms detailed in the US Studies Centre report, the case for making such a sizeable investment in the United States was incontrovertible when compared with the same option in Australia.
Let me give you three simple examples for why.
Bureaucracy: The US Studies report details the lengthy regulatory process companies face in Australia and our experience is no different. The approvals process for our Australian project took some three years – about the same time that it took to construct the entire project in Louisiana. Our US plant was producing when we would have just started turning the first sod in Australia.
Workplace productivity: the cost to construct the project in Australia would have been 40 to 50 per cent more than what our Louisiana plant cost us.
Energy: To manufacture ammonia – and many commonly-used plastics and chemicals – gas is used as a raw material, in the same way as iron ore for the manufacture of steel. The competitive price of gas was a critical decision point for the Louisiana project. The US has a gas price of about $US3 per gigajoule, partly as a result of federal government policy. In Australia, previous Australian federal and state governments have allowed unfettered exports from the East Coast and the price of gas is as high as $20 for some industrial users; as well as adding $300 to $400 to some household energy bills. To his credit, Prime Minister Turnbull has regulated to ensure domestic supply is protected in balance with exports.
Confident in the US
While the United States has taken time to recover from the global financial crisis and there are some current headwinds, I'm confident about the outlook for the US economy.
There are predictions by many that the Chinese ascendancy is close. I have no doubt that will eventually happen – sooner or later. However, I have a soft spot for the United States and believe that their business-friendly culture will always provide that competitive edge. After all, it's a great place to do business.
James Fazzino is managing director and chief executive of Incitec Pivot Limited and adjunct professor to La Trobe Business School.