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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.

How Abbott is rebuilding the construction landscape

Tuesday, June 17, 2014

There are plenty of naïve people at the big end of town who haven’t yet realised the extent to which the Abbott government is changing the landscape of business in Australia.

The first dramatic signals came early this year when the government announced the end of corporate welfare. This had substance, with the rejection of taxpayer bailouts to Holden, Toyota, Coca Cola’s subsidiary SPC Ardmona and Qantas. The message to corporations was straightforward: grow up and stop your dependency on taxpayers!

Behind each of these bailout rejections was an annoyance at bad corporate industrial relations deals. The Fair Work Act doesn’t require any business to enter a union enterprise agreement or even negotiate with a union. Yet routinely businesses have been signing union deals that neuter their ability to manage their businesses. This applied to the companies mentioned above.

The Abbott government is saying that businesses that enter such deals must cope with the consequences themselves. Don’t expect government to fix your bad commercial arrangements!

The issue is at its most critical in the construction sector. Prime Minister Abbott has announced that he wants to be the “Infrastructure PM”. The substance of this was in the budget with $50 billion allocated, translating into $125bn of government construction work after allowing for public-private partnership arrangements.

The government’s political future hinges around this. If these projects are well underway at the time of the next federal election, the economy should be experiencing a construction growth surge. But there’s a problem: cost blowouts.

Trade Minister Andrew Robb made this clear, reporting on his recent investment sales pitch in the USA timed with the PM’s USA visit.

Uncontrolled construction costs are reportedly stopping the securing of $50bn of LNG projects a year, according to Robb. But he also made it clear that the companies seeking to invest need to control their labour costs themselves. The underlying message is the same: don’t enter bad industrial relations deals!

Costs blowouts in resource project construction have been in the order of 45 per cent over a six-year period. In a submission I made to the Productivity Commission Review into construction costs, I laid the blame for the costs blowouts squarely with the resource companies and their industry associations. In response, I’ve had ‘requests’ by associations to stop criticising them; I will if they stop pushing bad industrial relations deals onto construction businesses!

But for Coalition state governments across Australia, the construction cost blowouts threaten the very viability of their budgets. With construction demonstrably costing around 30 per cent more than it should, there’s been a unified course of action to fix the problem.

It started in Victoria in 2012 with the introduction of a robust construction code of conduct. The code has been replicated in New South Wales and Queensland. It’s likely to be introduced in Western Australia and should be passed federally after the change in the Senate after July 1.

Simply put, the code identifies arrangements in industrial relations deals that push up the cost of construction. If a construction firm wants to bid for government work they must eliminate those arrangements from their IR deals. They must do so on their private-sector work as well as government work.

The code was stymied in 2012 when the construction union the CFMEU successfully challenged the legality of the code. The Victorian government appealed and won handsomely in a Federal Court decision late December 2013.  Effectively the code has only been fully operational for five months affecting government construction tenders.

In the construction IR space, the equation is simple. For decades, the existence of state and federal Labor governments has meant that doing union deals was necessary to win government work. The new united focus of the states and federal Coalition governments has changed that deal-making environment.

Word in the construction industry last month was that the big players intended to ignore the code, believing the government would cave in. The federal minister responsible, Senator Eric Abetz, responded in a speech to the Master Builders Association that companies playing that game risked their financial futures.

Already in New South Wales, several major construction tenders have been awarded to foreign companies newly into the market, who don’t have union deals or histories of union involvement.

Just this week I chatted with a non-union subcontractor in Victoria. He was going to be kicked off a job controlled by a long-time union company. He mentioned that he’d complain to the code compliance unit and was immediately allowed to stay.

The federal government’s new head of the construction compliance unit, Nigel Hadgkiss, is heavily active in letting the entire industry know the government is serious. He’s been taking prosecutions and action on multiple fronts to ensure compliance with the law.

Anecdotally, there’s some indication of construction costs starting to come down. This is bad news for unions and the Labor Party, which has a vested political interest in seeing Abbott’s infrastructure vision being compromised.

Extremely slow on the uptake, however, are Australia’s resource companies, including BHP and Rio Tinto. They have operated on a mantra that union deals have been necessary to complete jobs, a view foolishly also held by the banks. But their approach has been responsible for cost blowouts and stymied the resource development potential of Australia.

It’s these big resource companies that need to wake up. The combined commercial might of the state and federal governments is changing the deal-making of construction in Australia. If the major resource companies don’t come on board, their competitors most likely will. I’d welcome such a development.

[First published in Business Spectator, June 2014]

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