Climbing out of a productivity quagmire

It hardly needs to be said that the wealth of a nation is built on the productivity of its people. Robert Gottliebsen aptly pointed out (Shelter from an Aussie dollar storm, May 7) that the high dollar shifts the Australian productivity challenge to a higher bar. He demonstrated how one company, Alcoa, with its workers, is confronting this challenge with real teamwork.

But the efforts of single companies are unfortunately being swamped by declining productivity across the economy and in critical sectors. In a late 2011 presentation by economist Saul Eslake observed that, "Australian labour productivity is back to where it was in the mid-1970s”. Commercial construction is surely the biggest headache.

My wakeup call happened when I saw unpublished statistics from one of Australia's largest construction firms. The graphs plotted a simple item, company revenue per worker. It showed a worrying downturn in late 2007 and a sharp drop since 2009. By late 2010 construction productivity was significantly below 2004 levels and declining.

Each of these construction productivity drop-off points coincided with changes made by the Rudd/Gillard governments over the powers of the Australian Building and Construction Commission and the rules the federal government applied to its construction tenders. Effectively the government removed key disciplines it had that required high productivity behaviours on its construction jobs.

Come mid this year with the Gillard government closing down the ABCC, the last disciplines will go. Expect to see further rapid construction productivity collapses and rapidly rising costs.

The prospects concern the Victorian government at least. They've been quite open in stating that they worry about a construction cost blow out. The Victorian Baillieu government has more reason than most to be spooked.

Just south of Melbourne is the still unfinished, white elephant desalination plant from which Victoria will pay not to draw water. On about a $5 billion construction job Leighton Holdings losses have been racing towards the billion-dollar mark. Make no mistake, the much larger proportion of the losses are directly attributable to an appalling industrial relations agreement triggering an uncontrolled productivity collapse.

Fortunately for the Baillieu government the desal plant is a fixed price project. Leighton must contractually suffer the losses. But the government sees massive budget risk. It's stated that, "…abolishing the ABCC will increase the costs to Victorian taxpayers of publicly-funded projects and undermine the Victorian Government's ability to fund and build infrastructure into the future.”

Rather than do nothing Ted Baillieu has announced that a new construction code of conduct will be applied to all government construction jobs in Victoria. The intention and draft of a code were announced mid last year. Now the final code has been released and is set to start soon.

The code is intended to ensure that any firm doing Victorian government funded or controlled work will have to eliminate from their industrial agreements and procedures, practices that the government considers harm productivity.

Such practices include the employment of non-working union officials on sites, limitations or restrictions on the use of independent contractors, imposition of non-working days and so on.

The Baillieu government does not have the jurisdiction to control the industrial agreements construction companies enter with unions. What the government has done is to say that in entering its commercial contracts it will exercise its authority as the client.

No one would question the governments right to contractually determine the colour its buildings will be painted. It's simply extending this commercial principle to productivity matters.

Some industrial relations commentators have claimed that provisions in Gillard's Fair Work Act will require the government to accept any industrial agreement a construction firm has. But even if this claim has a remote tinge of legal truth to it, think of the commercial dynamic to test this.

A construction company wanting government work will have to take the government to Fair Work Australia challenging the government's tender. FWA does not have jurisdiction over commercial contracts. Creative lawyers will need to spin legal arguments that will be subject to exhaustive, time consuming and costly litigation, probably to the High Court.

In the years this was happening the tender would be let and the construction project probably finished, that is of course unless the construction company could achieve a restraining order blocking the awarding of a tender. It would be fascinating to meet a construction company chief executive who thought such a legal venture would make commercial sense. Rather such action would more likely be a CEO career killer.

Instead, the more likely outcome is that construction companies will comply with the Victorian construction code of conduct. The government has put together a small but experienced compliance team located in Treasury, the heart of all government power!

If the Baillieu government's action succeeds, and on my estimate that is likely, Victoria could save itself from an impending 20 per cent cost blow-out in infrastructure construction cost. These are my estimates based on considerable research discussed previously.

What's also possible is a significant decrease in construction costs.

Should Baillieu's initiative succeed he's setting the foundations for a resurgent Victorian construction sector.

Ken Phillips is executive director of Independent Contractors Australia, and author of Independence and the Death of Employment.