Blame CEOs for a national cost explosion

When a nation like Australia is set to suffer a serious setback it's important for everyone to understand who were the main contributors to the disaster.

Australia is destined to have a catastrophic fall in mining investment in the 2013-16 years. The vast number of current projects under construction will be completed but then few new ones will be started. The new investment close down starts with coal and iron ore and then extends to gas.

Yesterday, I canvassed the likelihood that in coal and gas there would also be hit with a big fall in prices (iron ore may fare better) which, with the investment evaporation, would slash the dollar by 2015, Lightning risk to the Australian dollar, November 21)

On the question of price not everyone agrees, but there is almost universal agreement that we face a big investment run down.

This was underlined in the KGB interview with Santos CEO David Knox (KGB: Santos' David Knox, November 21).

Knox pointed out that it was three times more costly to build a plant in Australia than in the US. We have priced ourselves out of the market.

I start my blame for the project price escalation not with the unions or the government – where most blame is usually targeted – but rather with the chief executive officers of the companies involved in the gas, iron ore and coal expansions. Accordingly, I put it to David Knox that, as one of the CEOs involved, he personally should take his share of the responsibility. Knox is not one of the main culprits, and I admit it was unfair to pick him out, however his response was of importance. Knox says that in the Cooper Basin, where he has direct responsibility, Santos is well run and it was Bechtel who managed the Gladstone project. Without commenting on Bechtel's performance (which Knox defends) I simply do not believe a CEO can avoid responsibility by outsourcing to sub contractors.

But stepping aside from the specifics of the Santos situation, I believe our CEOs made three fundamental errors, and as each CEO announces a cost over run they should be held accountable. The CEO mistakes vary from project to project but they fall into three or four baskets:

– Mistake one was to try to bring their resources into production at a time when there were too many projects being developed and there was no where near enough labour. Inevitably that would cause chaos and vastly escalate the costs so making the projects very vulnerable to any price down turn. How the unions responded was totally predictable given the CEO error.

– CEO mistake two was to enter too many projects in haste and not plan them properly. This particularly applies to some of the Queensland gas projects and possibly Gorgon.

– CEO mistake three was to either agree to or allow subcontractors to agree to hopeless labour agreements that gave unions power over the projects. That not only hit the projects but the desire for union management control spread around the country and the unions now want this to be a permanent part of the Australian construction industry fabric. If successful, this means the nation will suffer inflated construction costs for decades as a result of the mining CEOs' foolishness.

The efforts of the Victorian Premier Ted Baillieu to institute building site requirements for Victoria, which will slash infrastructure construction costs by 20 to 25 per cent, have been met with an unprecedented attack on Grocon – one of the few builders with the management capacity to comply and cut the costs. That union attack includes trying to marshall industry superannuation funds to starve Grocon of capital for projects. (Battle lines drawn for a construction cost war, November 21).

– Not to take out enough hedging against the high likelihood that the Australian dollar would skyrocket. This is a grey area because the dollar actually helped many projects as they imported equipment.

Of course, as the mineral industry says with one voice, the federal and state governments must take a large slice of the blame along with the unions. It was not only the CEOs who made errors. Knowing they had a mining boom ahead the Rudd/Gillard Labor government introduced a pro-union set of industrial relations laws that greatly enhanced the power of the unions to exploit the mistakes of the CEOs.

And the unions themselves have been ruthless, although that was totally predictable given the environment created by the federal government and the power given to the unions by the CEOs.

Step by step we have to return competitiveness. That must start with an Australia wide backing of Grocon. Other states and particularly Queensland and WA must follow the Victorian lead. We need CEOs who will not sign off on agreements that give management control of contracts to unions. No more HR department nonsense that there is ‘no choice'. We will hope for action from Canberra, but no matter who wins the next election, I doubt whether we will see any. We must rely on the states.

Finally, competitiveness will be restored by a big fall in the Australian dollar, and while this may not happen for some time, the words of Reserve Bank Governor Glenn Stevens address to CEDA this week that the dollar was "a little on the high side” still ring in my ears (Lightning risk to the Australian dollar, November 21).