KGB: Hamish Tyrwhitt

Leighton Holdings chief executive officer Hamish Tyrwhitt tells Business Spectator's Robert Gottliebsen and Stephen Bartholomeusz:

• Leighton is reviewing its engineering design quality in the wake of the Desal plant and Airport Link 'disasters'

• The Fair Work Act is pushing up the cost of construction, above the rate of CPI, due to productivity losses

• These costs, and others, are being passed on in tenders currently being prepared

• Australia is almost at capacity for growth, and while Leighton is not currently constrained by labour skills shortages, Australia will be in the future

• Leighton aims to have 30 per cent of its business offshore, predominantly in Asia

Stephen Bartholomeusz: Hamish, I understand that you spent 25 years at Leighton before this abrupt elevation to the CEO role. Was the Leighton you saw as a senior executive out of Asia the Leighton that you've come to appreciate as CEO, or are they different?

Hamish Tyrwhitt: They're very different actually. And you say I've had 25 years with the company. I didn't have it all with Leighton. I originally started off with John Holland and went to Leighton International as at that stage. I then came here to Leighton Contractors. I then went to Leighton Asia and then to Leighton Holdings. And there are, I guess, two parts of the answer. One is Leighton Holdings and what is it? And the other one is what are our operating companies? I had time in all of the operating companies and they are all very, very different. They're all underpinned by the same basic, corporate values and corporate culture, but each of them has their own interpretation of that, so they've got quite unique corporate DNA. They've got quite unique core competencies. All general contractors at their heart, but it's incredible to see how they've involved over time. The big difference of going to Leighton Holdings is Leighton Holdings is not a construction company. You know, one of the things that shocked me going in there is, you know, you ask people to put your hand up if you're an engineer. Well, there aren't any or they're very few and that's because Leighton Holdings is a strategic management company. They have no clients. They have no customers. All of the projects are delivered through our operating company, so Leighton Holdings is responsible for the balance sheet, the strategic direction of the company. The operating companies are where we deliver and where we carry out our projects.

SB: Should you have more engineers within Leighton Holdings?

HT: I think the issue, should we have more engineers, and if I interpret that question a certain way, it's where should risk be mitigated? Now, for me, risk needs to be mitigated at a source where it's identified, where you can actually influence the outcome. So, where I want to see more engineers is on our projects, right? Or in our pre-contract teams because if we take away from the accountability of our projects, people think that risk is being mitigated in a head office, where it's not. It needs to be mitigated at the source. So, the risk that Leighton Holdings experiences is strategic risk, enterprise risk – how are we managing our balance sheet, are we positioning the company for sustainable growth? That's what Leighton should be managing at Leighton Holdings' level and that's not necessarily engineers. I'm an engineer. We do need engineers and construction people in there, but we also need people with different skills that manage corporate public company risk, not just focusing on project risk because that should be mitigated at its source which is at the projects.

SB: Throughout its history Leighton has been a fantastic story and a fantastic success story and then all of a sudden you have these projects blowing up – the desal plant, the joint venture in the Middle East. Did something go wrong, or was there just kind of a string of coincidental disasters?

HT: You know, I refer to them as the tsunamis and two of those tsunamis are very similar which are Airport Link and VDP because they're both projects. HLG which is the Middle East was an investment. That has totally different reasons why we're having challenges there – we actually, for the first time in the company's history, spent a lot of money buying a company that was a property developer in Dubai at the height of the bubble, at the peak. Now, we got the timing wrong in everything, so that is quite a unique challenge in itself. It's an investment and it's in a business that is driven by petro dollars. So, that is more of an investment problem or an investment tsunami which, you know, those things do happen every now and again. Would we overpay for a company going forward again? No, absolutely not. With Airport Link and VDP, that's the core of our business which is projects and it was just incredibly unusual that we had two major disasters on our projects happening at the same time. And if you look at the percentage completed of those jobs, one's 92 per cent, one's 95 per cent today, so that wave of tsunamis is on top each other and it's just flowed through since the problems were first identified last April, so it's been a challenge.

Robert Gottliebsen: Are the mistakes that were made in the desalination plant very similar to the Southern Cross Railway Station mistakes? You, of course, helped to rescue that Southern Cross contract.

HT: When something goes wrong as big as this it's not traced back to one root cause. We've done a thorough review of lessons learned and risk assessment to see how we can mitigate these issues from happening in the future, and I've tried to look at what is common across all of them. And one thing that's common across all of them is people. Leighton has got 54,000 staff and we rely on our people to use the right judgement. Our tools don't tell us how much things cost. How people enter information into our tools and the output you need is finally a tender. People review tender specifications and quantities and contracts. If I look back at it, at all of those, we made some errors during the tender phase which were identified during the delivery phase. Now, one of the things that is common to all of those projects is their PPPs and in the PPP we do all of the design and we don't deliver or develop the design past about 20 per cent complete at tender stage. So, as we win the job we start developing the solution and we start working through it, so you know you get to 50, 60 per cent complete through those jobs and all of a sudden you have a full set of drawings of what you're going to build and then you can price it, and if that doesn't equal what you assumed originally, we have a problem.

RG: Both in Southern Cross and in the desalination plant, the relationship with the union and the workforce were big reasons for both losses and they were very similar. And interestingly, in the case of the desalination plant Holland, which approached it in an entirely different way to Thiess, who actually won the contract, actually tendered lower. It was a fascinating scenario.

HT: Yeah. And that just goes to show that it's about the overall solution. PPP isn't just about the construction; it's about the solution in regard to all of the components of the PPP. In Spencer Street, the major challenge there was just how to build it. We were operating over a live rail track. Connex in those days were the rail operator. We had to get access. So, there were a lot of issues just with ‘how on earth do we build this'? We shut the rail down for three or four hours at night and all of a sudden it rains or there's a bit of wind. We can't work. Then that same thing happens the next day and the next day. The engineering solution didn't necessarily deal with the environment that we were working in. Now, yes, there were industrial problems, but the industrial problems on Spencer Street were very different from what was occurring on VDP. Spencer Street, there was a lot of frustration over how do we work in this live environment? We never closed the station. The whole time the station was built, the people, the public were coming in and out. It was hard to distinguish where is the construction side, where is the public station? And all the time we had to create a safe environment and that meant that everybody was on their toes on that job. In the end of the day Spencer Street, for me – yes it lost a lot of money, but it won all sorts of awards for architecture, for engineering and certainly for the state. It is by far the best railway station in Australia and arguably in this part of the world. With VDP it's a totally different environment. With VDP the issues are more around the roster and around productivity because that's a greenfield site. We've been able to contain the site, and a lot of issues there with cyclonic conditions with the weather that has meant that we haven't been able to work as productively as what we originally planned.

RG: Do you think you've taken all the loss or is there more to come?

HT: The loss on the cost is contained. When the job's 93-95 per cent complete, even if there's a five per cent or a ten per cent blow out, it's not a material impact. The big issue with those projects is time. And we're moving into a critical phase now which is the commissioning of the plant and if that goes well and we get first water in July, like we currently programming and like we have in our budgets, then we're fine. But the challenge on VDP is just getting that first water in July and then repeating the same process in your handover at the end of the year.

SB: But the description you gave with the way those projects evolved, and the fact that you can't get a proper handle on the costs until you're well into it, is there anything you can do to mitigate that, or you just must go into those PPPs?

HT: It's not that you can't get a proper handle on the costs. You make various assumptions and 99 per cent of the time those assumptions we make are correct. But if something happens there – clauses such as durability, if there's an issue with the working environment and spans have to get larger, therefore you need more beams, more steel, quantities start to grow. If you can't get into a site and actually evaluate the geotechnical conditions because it's a working environment, there are things that definitely can be done in the industry to minimize the risks and minimise the likelihood of any cost or quantity overrun. Usually it is quantity overrun that results in a cost overrun.

SB: But will you do things fundamentally different in the future in relation to those large projects?

HT: Yeah. The main area is around engineering and the quality of the engineering design that we get. We rely usually on consultants to outsource engineering to give us the advice, the basic parameters that we need and that's something that we're reviewing – the quality of that information that we get, so that the assumptions that we make – mainly on quantities and what the finished product is going to look like – is correct or with a high degree of accuracy.

SB: You've referred publically to the concept of adding your skills base, and more sort of IP within the group. Is that part of that response?

HT: Very much. You know, if I go back in time and you look at Leighton Group, we used to have a part of Leighton called technical resources and it used to be part of Leighton Holdings and in there were a whole series of engineers and planners and forecasters and people that did methodology and they were best in class. They were the best that the company had. When we started bidding against each other across the operating company models, because of probity we couldn't access those shared skills. So, one of the negatives about the company bidding together on what are high risk jobs is that each individual team puts up the best people that they possibly have, but that may not be the best team that the group has. So, certainly going forward when we see a high risk job that really requires the group to muster all of its strength and skills together, we need to go back to what existed a long time ago which was this shared technical resource base.

RG: Do you think Australia has enough labour to complete all these mining projects? Are there too many? Or can they be done somewhere near the schedules that have been set out for them?

HT: Well, if you had asked me this a year ago, we would have highlighted people as a major concern. We saw that as the major business risk. In December of this year or January we did 30 per cent more work than we did in the period 12 months before. Since our AGM in November we've gone from 51,000 staff to 54,000 staff. So, currently we're delivering at the right momentum, so Leighton has the right number of resources to deliver on its commitments. The one thing that Australia has is an incredibly skilled workforce. Our tradesmen, our skill level is very high. What we've got to work on is the working environment to enable those skills to be used more productively and efficiently. To me, it's not about the number of people; it's about the output from those people. Are we currently constrained by people? No. Will Australia be constrained by people in the future? I believe yes because Australia has so much more to offer the region than what we're currently doing. Now, Australia may choose that no, we don't mind being constrained. You know, how much growth is enough growth? So, do you want the Australian dollar to continue growing and getting these large surpluses coming through? So, I think right now Australia is probably almost at capacity. A company like Leighton though is a good employer of people. We're able to attract people, so we're currently not constrained by people.

SB: Are you constrained by the Fair Work Act?

HT: The issue for me is around the government agenda. I'd use an example: on our mining fleets, for instance, we can have someone step out of a truck and step in a truck and start driving because as soon as they get here – and there's a dispatch system which tells them which digger to go to – and it's like a baton change. It's a very efficient baton change like you get in the Olympics and very productive, works very well. But if you're on, say, a four day on, four day off roster and it's an electrician wiring up some complicated lighting or acoustic system in a room like this and they're six hours into the job and all of a sudden their shift ends, the next day someone comes they have to undo everything that's been done and start again. So there needs to be flexibility to enable people to use their skills to carry out a task, but by limiting the work and the rosters, some of the things that are coming in are really making it very challenging for productivity in the industry.

RG: Can't you as managers negotiate deals that overcome that?

HT: The problem is that there's no one deal for one issue. You know, in a factory that's got production work, rosters are fantastic. It works very well, but it depends on the trade and the environment. I guess the main point for me is that there's no one solution for this productivity issue. There has to be an element of flexibility to deal with all the different environments, all the different issues that they've got, all the different skills, the levels of trade, the complexity of what we're doing.

RG: Is this a new thing as a result of the new Fair Work Act or has it always been a problem; it's just that there's more of it now?

HT: Look, I think the challenges have evolved over time. There's no question. For me looking at the biggest negative at the moment is regard to the impact that it's had on productivity.

RG: The Fair Work Act?

HT: The Fair Work Act. And if you look at the impact it's had on productivity… I look across all of the regions that Leighton works in. We're an Australasian company. And of my concern is that Australia, while it's currently benefiting from commodities and resources, it's becoming less and less productive. We want Australia to be sustainable, right, but we can't let these great profits in other areas that are being made mask the systemic problem with productivity. It's not about what we pay people; it's about the output we get from people. I talk to our workers on the site. They've got a huge amount of pride in what they do. People, they're craftsmen. They're tradesmen, right. They don't want to leave halfway through something. If they start something, they want to finish it. They want to do it. I think that's the key issue that has come to my attention in recent times.

RG: How much do you think that the Fair Work Act has put up the costs of buildings and big projects given that fall in productivity?

HT: It's actually not that easy for us to determine because, if you look at Leighton, they're putting in tenders and we're pricing on today's price, so who pays for that increase in productivity? It's actually the clients. It's the user of the asset. It's the Australian Government, the taxman. It's us. If it costs us X dollars one month and two months later it's 10 per cent more, well we just bill 10 per cent more into our estimate.

RG: How much has it gone up do you think? Has it gone up 10 per cent? 20 per cent?

HT: I think if you look another way, it hasn't gone up at the same rate as the CPI – no, most definitely, it's worse.

RG: How much further?

HT: It's hard to estimate exactly. I had a very interesting discussion with the US company and they operate all through the region and they're all about people, and they were saying when they calculate what country to go into they look at productivity output of a person, they look at the cost per hour of that person, they look at the skill set. They put all of those things together in the formula and come up with an answer of: right, this is the best place to go. You may have to use more people in the country. You may have to use less. But they look at it at a dollar cost per output. Australia has just been deteriorating down the run which is why you're not seeing foreign direct investment coming in things like factories and people manufacturing here, etcetera. Why are we exporting so many raw materials? Is it we can't add value efficiently to them? It's reflected in just seeing that the Australian economy is going to the type of projects that are happening. But certainly through the region it's deteriorated a lot over the years.

RG: Have the yields gone up?

HT: But the productivity has gone down.

RG: So, you're becoming a mining contractor almost as these other areas start to decline?

HT: No. We're not. Because if you look to a mine, you've still got to put a railway in.

RG: Yes. A contractor for new mining projects?

HT: No, not at all. Our mining is the same ratio as what it's always been in our business because, don't forget, you build a mine, you've almost got to build a transportation network. It may cost more. The reality is with high commodity prices it masks an element of inefficiency in the cost for a period of time and the infrastructure can be paid for. It's not really a big impact on the mining side of the business. It's more an impact just on the urban centres around Australia.

SB: To get back to the group for a moment, you referred a number of times to the internal competition between the operating companies and that's the model that's been there for a long time now. Do you fine tune that? Do you leave it? Do you think it's a positive for the group?

HT: It has to be fine tuned and it always was fine tuned. When I first joined the group I was actually part of John Holland, and John Holland wasn't part of the Leighton Group then. It joined the Leighton Group in 2000. Through the years we've spun out Leighton Properties. We've created HLG. We had Leighton International, Leighton Asia. Every three or four months there's a tweak done to the model. You know, there's a new core competency that gets delivered. I think having multiple operating companies is great. What we've got to do is make sure that they're known for certain core competencies. They're all general contractors at their core, but over time what you'll do is that when we have a discussion you'll say ‘yes I know'. Company A is renowned for this. You know, it may be telecommunication. It may be the rail arm. It may be the tunneling arm. It may be the contract mining arm. So, certainly, what we're looking for is as the model evolves it'll be evolving towards delivering those core competencies and then we'll take those core competencies to markets where they're valued, and that may be throughout the whole Australasian region. So, our model is about diversification by brand, by geography and by sector.

SB: Leighton has now got a big presence outside Australia, and you've obviously coming fresh out of Asia, is that the focus for growth outside Australia?

HT: Australia is going to continue growing, but Asia is going to grow faster, so we've got aspirational targets of having 30 per cent of our business offshore and that will be predominantly in the Asian region.

SB: What is the turnover?

HT: The turnover is about 12 to 15 per cent, but the work in hand is over 20 per cent. So, the lead indicators are that more of our order book is currently overseas than what it was previously and we're seeing more opportunities coming up as the economic conditions in Asia start to improve. We've got about five-and-a-half per cent growth across all the markets we work in in Asia and it's across all our core skills. It's about commodities, resources and about infrastructure.

RG: Your predecessor was Wal King, of course, and Wal would point to the work in progress and say: that's my profit; I've basically got my profit underwritten, profit rises underwritten well into the future unless there's a big mistake somewhere, a contract mistake. Do you feel you're in that situation – that, barring a disaster somewhere, your profits underwritten well into the future?

HT: Well, when I did the results this Monday, we for one of the first times communicated what our profit was on our projects and it's over 10 per cent. And you think about that. You know, that's 10 per cent over five years of a number of $46 billion. You know, it's four and a half billion dollars, so you know we have an incredible base of work in our projects. Now, yes there are business drivers, there are risks and everything that we monitor and we mitigate, but our core of our business is as good as it's ever been and the market is delivering to us fantastic opportunities in our core competencies. And, you know, what Wal said is 100 per cent right. We can never lose track of the fact that we're a project based business. We're a company, or operating companies, made up of over 400 projects. That's where our money is made and that's where we need to make sure that we make the money.

RG: And these higher costs from Australia that are coming up, in Fair Work and in other places. So far, you've got to pass them on?

HT: Well, we in the end of the day, we're asked to price the solution. Under preparation today is $30 billion worth of tenders across the Leighton Group – $30 billion worth.

RG: That's in addition to the forty…

HT: That's the tenders that are currently being prepared. So, all of those tenders are being prepared with current day pricing, current day productivity, etcetera. Obviously that's what we do.

RG: You're going to pass it on?

HT: Of course. It's not necessarily passing it on; it's providing the solutions, so you know there's no way that Leighton are going to price a job and not price in the reality of what it's going to cost, so if there's escalation in materials, if there's another solution we can pass on savings, value engineering, we pass those on, but if there's an increased cost in labour, we also pass that on.

RG: And that means our roads and our hospitals cost more?

HT: If there's escalation, it does.

SB: Thank you very much indeed, Hamish.

RG: Thank you very much. We appreciate it.