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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.

IR ghosts of Leighton past

Monday, April 11, 2011

The failure of NBN Co to attract contractors that can build the network at even a reasonable cost and the financial troubles of Leighton’s Theiss unit in getting the Victorian desalination plant off the ground are just the tip of an industrial relations iceberg that will have a chilling effect on Australian productivity.

How Australia got to this unfortunate position of self-induced wealth destruction requires an understanding of the how the industrial relations agreements currently being rolled out for new construction jobs across Australia have been linked to huge cost blow-outs in the past.

While over the six years to 2008 productivity in construction improved by at least 10 per cent, largely due to the enforcement of the rule of law in the sector by the Australian Building and Construction Commission, these gains have not been maintained.

I recently saw unpublished figures demonstrating a collapse in construction productivity of around 30 per cent (based on revenue per worker) since 2009.

This productivity crisis coincides with a key decision of the Labor government that marginalised the ABCC and severed discipline in construction.

The ABCC enforces the federal government’s construction code of practice. The code had previously required construction companies to comply with industrial agreement standards that constrained excessive union power. Non-compliance meant no access to government work, a powerful commercial inducement!

In 2009, however, the Rudd/Gillard government announced that the entering of any industrial agreement constituted compliance with the construction code. This released construction firms and unions from the discipline imposed by the previous code.

It was also around this time construction unions CFMEU and AMWU were engaged in and ultimately fined $1.3 million over the unlawful work practices and the coercive actions of some members, particularly in regards to site access, at the violent protests surrounding the upgrade of Melbourne’s Westgate Bridge.

The unions suffered in the courts but won ‘on the ground’. An ALP factional ‘peace’ deal done by the Brumby government gave them site coverage. Their real target though was control of the Victorian government’s planned $5 billion desalination plant.

The Victorian Trades Hall Council put together a multi-union desal industrial relations agreement that Thiess signed. Thiess must have thought it was smart because it won the tender even though Theiss was more expansive than other tenderers who’d not done the THC union deal.

Unfortunately for Thiess and it parent company Leighton Holdings, this was the ‘bad deal of the century’.

The deal gives the radical CFMEU substantial control of the site, restricts and controls the use of contractors, effectively requires Thiess to pay non-working union representatives to be on site, blocks out large periods of time when work is prohibited, imposes huge new redundancy provisions and increases pay rates by around a third compared to current construction rates. There are clauses that allegedly breach the Fair Work Act.

Perhaps the workers on site are worth the exorbitant six-figure packages they’re reportedly on.

But with the industrial agreement Thiess signed all but guaranteeing big cost overruns will occur, it’s predetermined that the job will not finish on time or within budget. I’ve detailed why this is the case in studies I’ve previously done comparing the Melbourne Eastlink-Citylink projects and the Melbourne Commonwealth Games construction. The desal industrial agreement creates far worse scenarios than the ones highlighted in those previous assessments.

But this situation is not contained to Victoria. The Victorian desal agreement is now being used as the benchmark by unions for the negotiation of new construction jobs across Australia. It’s affecting mining projects in all states, particularly natural gas development. Government infrastructure development is being hit hard. The Victorian Baillieu government is showing intelligence in stalling new projects while it assesses the situation.

Last week’s failure of NBN Co to attract reasonably priced tenders for the national broadband construction is the first likely display of the desal plant flow on. I understand that a standard industrial relations ‘understanding’ was being pushed that underpinned the tenders being made to NBN Co. The arrangements allegedly reflected much, if not most, of the desal agreement. Construction contractors are margin players. They simply add their margin to the requirements under any job – hence the cost blow out!

On this basis, the NBN dream has turned into an uncontrollable cost nightmare. For the Gillard government, this is their own industrial relations policies and processes coming back to bite them hard.

For Australia, it’s a bigger nightmare. Just as the mining boom raises the prospect of a sustained miracle economy, our failure as a nation to aspire to a competitive labour environment threatens to kill the miracle. We did this as a nation during the 1970-80s, particularly in mining, but have largely pulled ourselves out of this trend over the last two decades. Now, the evidence is that Australia is returning to an economically self-destructive path.
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