An East West wake-up call for Leighton

The dumping of the John Holland-Leighton bid for Victoria’s $8 billion East West Link should be a wake-up call for the Spanish-controlled construction giant. The East West Link was the first big tender conducted under the new code of conduct for government tenders, albeit the Victorian version of the code. (The Victorian code is a mirror image of the proposed Commonwealth code, which has yet to pass the parliament, but is almost certain to be enacted by the Senate after July 1.)

The two final tenderers will now be a group put together by Lend Lease, and an international consortium put together by Macquarie and Europe’s Ferrovial, which is one of world's largest builders and investors in transportation infrastructures.

The state and federal codes, along with the new powers of the Australian Building and Construction Commission, are designed to break the cartel-style agreements between big builders (like Leighton and Lend Lease) and the unions. These agreements curtailed competition and slashed productivity because they gave unions extensive powers, including control over who could be subcontractors.

Once the federal code is in place we will see much more international competition for big government tenders. Previously only those with close links to unions could tender.

In the preliminary East West tender, both Leighton and Lend Lease insisted that their subcontractors obey the new code. But not all subcontractors have the management ability to use the code and lower their tender prices.

You will remember that in 2012 the Lend Lease board was shocked when it found that management had signed an agreement with the unions, deliberately snubbing the Victorian government building code. Worse still, the Lend Lease management made a public statement about the agreement which, at best, stretched the truth (Lend Lease strikes out on an unholy union, December 18, 2012; The changing state of Victorian construction, October 18, 2012).

To their credit, Lend Lease used that incident as a wake-up call and has since done a lot more work in preparing the company and its subcontractors for the new era.

That work has paid off and, despite being given a ban over its 2012 antics, Lend Lease made it to the East West Link shortlist.

Meanwhile, Leighton has been distracted by the battle for control over the company, but it needs extensive change if it is to adapt to get government work. Historically the part of the group with most experience at operating outside the cartel-style agreements was John Holland, but there have been major management changes at John Holland which reduced skills to lower tender prices by operating outside cartel-style agreements.

John Holland is to be sold and any buyer will be hoping that there is still enough culture and management ability left in the company to take advantage of the new environment. That effectively means lowering tender levels by 15 to 30 per cent in places like Victoria and WA, and lesser numbers in other states. However, where a large tunnelling project is involved (like East West), the labour content is much lower -- so the price reduction as a result of the end of the cartel-style agreements is much less.

A problem for both Lend Lease and Leighton is that subcontractors and their industry association, the Master Builders, complain that many are having difficulty doing a deal with the unions to comply with the code -- particularly in the electrical area. Clearly those contractors who can’t manage their workforce need stop tendering for government business. There are plenty around with the required management ability. The old days have gone. The community does not have the money to fund the cartel-style agreements.