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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.

Victoria is building the conditions for a recession

Tuesday, May 12, 2015

Recessions can be politically induced. In Victoria, there are flashing red signals to suggest that scenario may be developing.

Let’s begin with last week’s Victorian budget.

The previous Coalition government spent four years keeping public sector wages under control. They had a ‘war’ with just about every public sector employee group and suffered electoral backlash as a result.

But this was critical to enabling a budget structured on surpluses. The new government is planning for surpluses (that’s good), but they’re immediately upping public sector wage costs by 7 per cent. This flags structural budget problems.

Such budget generosity to public sector employees is okay if the state economy is healthy. But in this case, a highly dangerous situation is developing. On the policy front, the government has moved with a package of policies and behaviours that threaten economic viability.

In a recent Business Spectator article (Victoria is no longer the place to be for business, April 20) I explained that the cancellation of the East West Link had little to with preference of rail over road. It was instead to do with the fact that the construction union, the CFMEU, did not have contractual control of the job. The government is effectively paying up to $900 million to not build the road and through this, ensures CFMEU control of Victorian infrastructure construction.

Reinforcing my assessment is that the government has now announced it’s backing a private offer to fund and build an almost identical project to East West Link. The Transurban proposal is to build the western half of the full East West Link. The cancelled project was to build the eastern half. It’s bizarre but that’s the situation. It’s certain that the CFMEU will control any Transurban road build.

There’d be no problem with CFMEU control of construction if construction costs were affordable. But all evidence suggests that control by the CFMEU adds between 15 to 34 per cent to costs. Expect any Transurban project to be much more expensive to build than the cancelled project.

I’ve further explained (Victoria is heading down NSW’s path of corruption, April 27) that in the government giving the CFMEU control of construction they trigger the start of institutional corruption in Victoria. This is reinforced by the Victorian sovereign risk in play (Victoria’s sovereign risk problem, February 27). Victorian contracts and approvals have become subject to change or cancellation based on political favour, a fact now understood globally.

This is having an immediate impact. I know one developer who has quietly pulled a $40m Victorian infrastructure proposal because of this sovereign risk consideration.

The Victorian Government’s messaging is clear. Last month it rejected a development application from Grocon, the construction firm despised by the CFMEU. Developers and builders are reading these signals: either build using the CFMEU (at higher cost) or don’t build.

The chat in the construction industry is that much recalculation is being done factoring in the historically known CFMEU cost blowouts. It’s not looking good. The figures are not shaping up for viable Victorian construction. Builders are doubting if they can build projects, including apartments, at a price that will produce a profit.

As one example, a fully approved ready to build, Chinese-owned apartment development has suddenly come onto the market, heavily discounted. Presumably something has happened with the Chinese owners’ calculations to want them to exit the project.

Robert Gottliebsen has been arguing that the Victorian construction market and economy would be held up by the huge quantity of apartment approvals in the pipeline. This week he rang warning bells that the Victorian (and Federal) governments sudden cash-grab attack against foreign (Chinese) residential buys could cause a stampede exit (The four forces sending shudders through the stockmarket, May 6). He even speculated that this could be a factor in the sudden stockmarket declines.

In this CFMEU-controlled construction market, builders and developers have to be hugely careful. Builders who take on fixed price jobs will be in high-risk territory. The history of the Victorian CFMEU is that it has always pushed up costs even beyond inflated budgets. Developers would be crazy to accept cost plus construction contracts, thus wearing all the risk where costs are unpredictable. It’s a pincer movement against the Victorian economy.

The only safe construction will be government-funded. The Victorian budget allocates $22bn for schools, roads, hospitals and more with $9-11bn of that for the Metro Rail project. This will all be CFMEU-controlled. Predicted excessive costs will be paid by taxpayers. There are major national implications.

The Andrews Government’s behaviour with possible or probable recession consequences has historical precedent. In a follow up article I’ll compare this current situation to the Cain/Kirner government period in Victoria (1982-92) and the deep recession that resulted.

[First published in Business Spectator, May 2015]

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