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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.

Contract killers for the mining boom

Monday, April 15, 2013

Woodside's announcement last week that it would pull out of its $45 billion onshore Browse LNG project in Western Australia is a horrid whack in the head for Australia's wealth creation capacity. No responsible government can afford to ignore what's happened because there's surely more of this to come.

In particular the premiers of Queensland and Western Australia have most cause to be concerned as their looming potential resource project losses exceed anywhere else.

Woodside made it clear that the pullout decision was a direct outcome of cost increases in developing the project. On any reasonable assessment the biggest reason for the cost blowouts has been uncommercial industrial relations arrangements, into which the construction and resources sector have been routinely entering for close to five years.

Robert Gottliebsen and myself have been ringing alarm bells and predicting such outcomes on this front for several years. In August 2011 I said "There are warning signals flashing over Australia's resource boom. If not heeded, the expected boom could be significantly curtailed". The warning signals have not been heeded.

The dire trend first became apparent around 2010, with the major cost blowouts in the Victorian desalination plant. It was clear that the bad industrial relations deal Leighton had entered was the root cause of the almost $1 billion losses they have suffered.

It quickly became apparent that the Victorian desal deal set a bad benchmark that was spreading through the resources development sector. I commented that "...the Fair Work Authority signed off on giving the same warring unions that control the desal plant coverage of the ... Gorgon construction job in Western Australia". Last week Stephen Bartholomeusz confirmed that the $US37 billion construction budget for Gorgon has expanded to $US52 billion. That's a 40 per cent cost increase.

That increase is consistent with data I've seen showing average project construction cost increases in the Pilbara of 45 per cent in the last five years. This includes development projects such as Hope Downs4, AquilaJV, Cape Preston, Solomon & Western and Southdown to name some.

This graph starkly demonstrates the problem. Labour productivity in construction has been collapsing since 2008 and is forecast to drop further.

This June 2011 assessment I did of the NBN labour project agreement being required of NBN tenderers gives a good demonstration of why the construction productivity collapse. Pay rates are not the issue. The restrictive management clauses predetermine poor use of the workforce and the consequent poor project management.

It's not just construction that's the problem. Mining operations have also become less productive. This March 2013 report from the the Australian Bureau of Resources and Energy Economics explains that mining productivity has declined by about a third between 2001 and 2010.

But don't simply go blaming unions. Robert Gottliebsen exposed why this was happening (and it continues!) Gottliebsen cited a WA Chamber of Commerce and Industry document that explains to resource construction tenderers the terms of the labour agreements to which they must comply. That is, the Western Australia industrial relations club was imposing (and it continues to impose!) destructive industrial agreements across the entire resource sector (Miners must fess up on IR dirt; December 5, 2012).

Gottliebsen said that in agreeing to these industry pattern arrangements resource "... CEOs were signing a one-way ticket to a productivity disaster that would destroy the mineral construction boom." The disaster is happening.

For the first time, these imposed project agreements can be revealed. Prepared by CCIWA here are two deals, the Wheatstone LNG agreement and BHP Iron Ore projects agreement.

The premiers of Western Australia and Queensland need to stare this threat to their states in the face. The problems is not the unions. It's instead caused by the resource and construction companies themselves going along with the self-destructive advice and arrangements being put together by their industrial relations advisers, lawyers and employer member organisations.

The premiers have the power to do something. First, it's to quickly implement the construction code of conduct developed in Victoria and soon to apply in New South Wales and Queensland. Western Australia urgently needs to do the same. The code gives the states the capacity to reconfigure labour agreements on all future major infrastructure projects.

Second, the resources belong to the states. Why gives rights to extract resources to companies who've demonstrated an incapacity to deliver the resources in a cost competitive manner to global markets? Don't reward incompetent private sector executives!

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