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From the Desk of the Executive Director

Ken Phillips is co-founder and Executive Director of Independent Contractors of Australia. He is a published authority on independent contractor issues and directs research on related commercial and trade practices issues. Through his numerous articles in newspapers and think-tank and academic journals, Ken is known for approaching issues from outside normal perspectives and is frequently sought out for media comment.

Can Baillieu stop the desal drain?

Friday, December 03, 2010

The Brumby government's surprise defeat in Victoria has been blamed on several factors. One element is the allegation of widespread waste---the most well known example would probably be the $5.7 billion desalination plant.

On the reasoning I explain below the plant is probably costing up to $1 billion more to construct than it should. That's a lot of waste and it's caused by endemic bad industrial relations deals. A history of the Bracks/Brumby ALP governments demonstrates the problem.

When Steve Bracks unexpectedly won office in 1999 he was immediately met with the development of the largest food-manufacturing infrastructure project ever proposed in Australia. The giant Japanese restaurant chain Saizeriya began construction in Western Melbourne on an eight-stage factory complex to supply their restaurants.

But the new government stuffed it up. They recommended to Saizeriya that they do an enterprise agreement with the National Union of Workers. This upset the Australian Manufacturing Workers Union. The AMWU teamed up with the construction union (CFMEU) and electrical union (ETU) to disrupt the plant's construction. The full story came out in the Cole Commission inquiry into the corruption in the construction sector.

Saizeriya's first plant was finally finished some two years late and massively over budget. None of the other plants have or will ever be built.

Move forward to the 2006 Commonwealth Games. The ALP government handed construction of the venues to the same construction unions who muscled Saizeriya. I've run the numbers on the Games Village and based on on previously undisclosed government contracts the Victorian Labor government accepted a cost blow out of at least 25 per cent ($50 million) because of the perceived need to deal with the construction unions.

The pattern continues. I've done a comparison between the $1.8 billion CityLink construction in 1999 and the $2.5 billion EastLink construction in 2006---it's interesting reading. CityLink was built using the AMWU, CFMEU and ETU and before new rules were imposed by the Australian Building and Construction Commission (ABCC). EastLink was constructed once the ABCC rules came into play and used a different union, the Australian Workers Union (AWU). Thanks to the more favourable elements extended to the union dominated CityLink deal, I calculated that EastLink was around 14 per cent cheaper to build for a saving of around $300 million.

What's important to understand is that the union battles for control of Victorian construction jobs play out behind the scenes in the political factionalism of the Victorian ALP and the government. The freezing out of the bullheaded unions on the EastLink project resulted in enormous, factional infighting inside the Victorian Labor government.

This exploded on the 2009 Westgate Bridge upgrade. This time the CFMEU and AMWU waged violent war against the AWU. They were fined $1.3 million as a result of their aggression. But it appears the fine was acceptable for them as their real target was control of the proposed desalination plant construction. They proved to the Brumby government that if they're weren't given control of the desal plant they would violently disrupt its construction. It's a situation that was made worse by the Gillard government's watering down of powers of the ABCC, which reopened the door for the unruly unions.

The $5.7 billion desal construction contract was awarded to Thiess, a Leighton Holdings construction subsidiary, which signed a deal through the Victorian Trades Hall Council with the CFMEU, ETU and AMWU. Other tenderers decided to exclude these unions from their proposals---they lost.

Without knowing details it's a reasonable to presume that the desalination plant has in-built, contracted, construction cost blows outs of the order seen on the Commonwealth Games construction (at least 20 per cent of $5.7 billion). The Victorian taxpayer is picking up this bill.

But there's more. Thiess seems to have problems keeping the job on time and within the fixed contracted price. This year Thiess on-site managers employed 'spies' to monitor the work of the union workforces. Such action is a sure sign of management panic when unions are not delivering on agreed workforce performance indicators. We've seen this numerous times before. There must be lots of worried executives at Thiess.

For the Victorian Labor Party, and equally the Gillard government, they are caught in a bind. To achieve and hold government they must demonstrate capacity for efficient governance. Yet on key construction jobs the construction unions use their political grunt to dictate terms. They probably now have more power within Labor than they've had for thirty years. With the NBN based in Melbourne, watch the cost blowouts at Australia's largest ever infrastructure project due to this dynamic.

For the incoming Victorian Baillieu government the challenge is large. Because of the Coalition's win the unions are likely to cause more trouble at the desal plant. State Coalition governments have a history of talking tough but doing behind the scenes union deals on major projects. For Ted Baillieu this means that on future projects he'll wear blame for waste if he doesn't find a way to deny the radical construction unions control of state projects.

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