Leighton chief executive Hamish Tyrwhitt tells Robert Gottliebsen and Stephen Bartholomeusz:
– Why the group tweaked competition between its operating entities.
– Why the company is valuing the quality of new projects over quantity.
– The group's view on public-private partnerships after the desal plant and airport link experience.
– Why labour is only one factor among many in the productivity debate.
– What a slowing mining sector means for Leighton Holdings.
Stephen Bartholomeusz: Hamish, it must have been a relief to have got through a full year. You finally closed the book on the Vic desal plant and the Brisbane Airport Link losses and you’ve produced a result at the top end of your guidance without any major blemishes. How do you feel about it?
Hamish Tyrwhitt: It’s not a relief. If I look at, you know, what do I feel about it? I feel proud. We’re a company, as I’ve told you before, that’s made up of people and there are 56,000 people out there who worked incredibly hard over the last twelve months to make that possible. So, you know, I’m sitting here looking at the results and feel really proud of the achievements of the staff.
SB: You responded to those losses on those two projects and they were big losses by making changes to the nature of the entities within the group and the relationship between the holding company and the operating companies. Can you explain what you’ve done and why?
HT: Yeah. Probably the number one change we’ve made is really defining what the purpose of Leighton Holdings is and Leighton Holdings is a strategic management company, so we sit there, we look at what the benefits of being part of the Leighton group? What does our portfolio look like? Where should we allocate our balance sheet? Our leadership development and succession? But we deliver through our operating company. So, you know, we’ve supported our operating companies. We’ve shared best practice. We’ve harmonised systems. But in the end it’s about our operating companies delivering. Our operating companies being empowered and about Leighton Holdings providing the strategic portfolio overview.
Robert Gottliebsen: Hamish, under Wal King those operating companies competed with each other. My impression is they no longer do that. They submit their tenders to the finance director. The sort of vigorous competition under Wal doesn’t happen anymore.
HT: You’ve got to remember that the company is people, so what actually competed against each other, you know, might have been people and I can assure you that that hunger and desire to be successful and achieve is still there within the group. The thing is that it’s not as public as it was. It’s a very small percentage of our portfolio where our operating companies compete and it’s actually unique to Australia because the… you know, what people forget is a large part of our footprint is actually in Asia and the Middle East and there we have a brand that presents all of the services to the market. So, what we’re starting to do is to export those core competencies and standard of excellence across the whole of the Leighton group and really working with the opcos with what really differentiates them in the market place. All of our opcos in Australia are really good at infrastructure and building in urban centres and in the capital cities. But you know we’ve got… Leighton contractors have a strong footprint in iron ore in the west, you know Thiess will have a strong footprint in coal, in the Bowen Basin and so our operating companies in, geographically and sectors, have different niches. And I can assure you that competition desire to be successful is still there across the whole group and all of our projects.
RG: They used to compete on price and I have a question about that. I accept that that was only in a small area or in terms of the whole group, but where they had competencies, where there were joint competencies, they competed on price. We don’t see that now because the prices all go to the finance director.
HT: No, what actually happens is projects under our work procurement standards that we identify as a high risk were projects, you know, when we looked at them such as VDP and Airport Link, they come into Leighton Holdings through our risk management team led by Mike Rollo and at the very early stage we look at evaluating the risks, we look at evaluating the companies that we have and we work on assembling, you know, with the opcos, so that we present the best selection of companies forward to manage that risk. You look at North West Rail here. We’ve got a joint venture between John Holland and Thiess, a joint venture also between John Holland and Leighton on another package. So, what we’re doing is, before it actually gets to that price stage, we’re putting the best… our best foot forward with the best team, best people. And when I say team, it’s not just our own opcos, it’s also the consultant, the supply chain and everybody that helps support the delivery of our projects.
SB: Hamish, you seem to be less fixated today about the quantity of the work in hand than you might have been in the past and more concerned about the quality of the work you tender for and the margins that are available. Is that a fair comment?
HT: A very fair comment . So, we’ve made it clear that we don’t plan to grow for the sake of growth’s sake. You know, we’re a very large company. We see a lot of opportunities to grow by exporting our core competencies to markets where they’re valued and where we can extract value. But you know there’s no point us subsidising infrastructure. We want to get a fair return for our services and that really is the focus on the bottom line. But it’s not just about the price that we deliver to our clients, it’s about how can we be more productive, how can we get benefit about being part of the Leighton group, you know, reducing the number of tenders we put in, increasing our win rate, shared services, so… you know, our buying gains? So, that’s what we’re looking at is how can we differentiate ourselves and how can we add value, increase utilisation, increase our productivity?
SB: The two projects that got you into trouble were the PPPs in a sense. I think you’ve said that you’re not really keen on taking patronage risk in future, so I assume that means you’re not really keen on toll roads. Have you changed your perception of and approach to PPPs generally?
HT: I think though to say we’re not keen on toll roads is not a fair statement. You know, we’re an infrastructure builder and if I look at the infrastructure deficit and not just in toll roads but whether it’s urban infrastructure or economic infrastructure, we want to participate and we plan to participate in the development of those projects. What we’re talking about is ensuring that there is a fair risk and reward structure in that and in the end of the day we have to enter into contracts that we have the ability to get a return on and we’ve also got to understand and manage the risks and I think that’s what we’re talking to people about is, you know, if we enter into an arrangement where should risks lie? Who should be responsible for risks?
RG: Is that the main lesson or one of the main lessons you learned from the desalination plant?
HT: Well, the desalination plant wasn’t about the income stream in the PPP; that was… we had two major issues there. One was a productivity issue and the other one was inclement weather. They were the two issues that caused us large time delays.
RG: You’re suing AquaSure and then that goes on to the Victorian government over the Industrial Relations Act changes and cyclonic weather in Melbourne and in Victoria. Is that incorporated in your accounts in any way or is that just a contingent asset?
HT: No. Look, when we completed the job in December and, you know, have handed it over to AquaSure, we’re in discussions with AquaSure and the state on resolving the last of the commercial issues. But really the future for us now is not about Airport Link and VDP. You know, the team did an incredible job to complete both those projects last year against a lot of sceptics and, you know, we did a great job in the operation and delivery sense. What we’ve got to do now is to close off those projects. All those projects have a tail on them, but that tail is not big and the future that we’re looking at now is positioning ourselves to deliver $43.5 billion of work in hand that we’ve got and securing additional opportunities to make sure that we’ve got a promising and sustainable future.
RG: It’s about a billion dollars that we’re talking about and those…
HT: We haven’t valued a billion dollars’ worth of claims I can assure you of that.
HT: And I don’t really… It’s not appropriate that we discuss our, you know, commercial positions.
RG: That’s fair enough.
HT: We also have a joint venture partner on VDP in the Degremont part of the Suez Group and, you know, we’re obviously working very closely with our partners and look to see our entitlements.
RG: Is it fair to say that most of the desalination labour conditions and methods of operating in terms of labour relations have basically spread around the country into bigger contracts, so that the major infrastructure projects that are undertaken around the country basically follow the desalination precedence?
HT: No. I don’t think that’s fair at all. And I also don’t think it’s fair to sort of point to just labour productivity. Productivity manifests itself, you know, as the whole series of initiatives whether it’s skill level, it’s location, rosters, you know, sort of the nature of the trades, etcetera and, you know, we had a workforce that did an incredible job at VDP and at Airport Link and we’ve got, apart from those two projects, we’ve got another 400 projects spread around the world and around the country and every project has its different issues and it’s not all about productivity and certainly the productivity challenges that we’re seeing in Australia do not just manifest themselves in the labour rates. There’s a lot more to it.
SB: The IR environment and building and construction has been a major topic of discussion though recently, Hamish. Are you… you’re saying it’s not an issue for you?
HT: No. Look, it is an issue, but you’ve got to look at what percentage of our direct costs and indirect costs actually are labour and that varies from project to project. It’s a huge issue for Australia. Only just last week I was reading something about Sydney now is the most expensive city in the world and that should be a concern to the nation and I think that’s something that Australia has to address over time is its competitiveness, its relevance in the region, its overall efficiency and one of the key things that we’re going to need to focus on is infrastructure to help compensate that, to make ourselves more competitive, like education, training, population diversity. There are so many things that come into productivity and our relevance in the region and that’s certainly something that I’m sure both, whichever government is in power will work on.
RG: Hamish, the Victorian government has put in guidelines and banned Lend Lease. Are you able to meet those guidelines in Victoria?
HT: Well, we’re not banned, so that should answer itself.
RG: No, but you haven’t… no, I’m not sure that’s true. I think now that we’ve got… you signed an agreement before the fact whereas they signed it afterwards. Now, that’s a timing issue. Your agreement will come up for renewal and if you were to repeat the current agreement, you’d be banned.
HT: Yeah look, I think the issue that we have is we’ve got three operating companies that work in Victoria and obviously we will work very closely on a project by project basis on our industrial agreements and we will comply and we will work both with the unions and with governments and regulations and… to ensure that we navigate through these issues. I think the main challenge there is, as far as the industrial relations climate is during this transition period and, you know, it is unfortunate for those who test these things first out of the block, so it’s not good what we’re seeing happening down there, but if you look at our business and you look at Victoria, this is a bigger issue for Victoria because at the moment we do not have a lot of work in the state now that VDP is finished and Victoria does have needs of infrastructure. It has a lot of work that’s required, so it’s something that the state is going to have to work on and I’m sure they will.
RG: Do you think they will change the guidelines?
HT: I don’t want to comment on that. That’s not something I can speculate on, except, you know, as I pointed out before as a nation I’m sure it’s incumbent upon all of us, whether it’s political or business, to ensure that Australia remains relevant, productive, efficient and takes full advantage of its position at the foundation of the Asian century. We’re blessed with great resources. We’ve… you know, it’s an incredible country and I’m sure we’ll be good custodians of that opportunity in the future.
RG: Hamish, you mentioned earlier the North West Rail project in New South Wales. As I understand it, all the major tenderers have, and the subcontractors I think as well, have reached an agreement with the unions which set out the working conditions and the pay rate and the overtime rates and all the things that take place in that contract and they all have the same agreement. So therefore you tender on the basis of your margin and in your skills in tunnelling and things of that sort, but the labour conditions are uniform for all. Would you agree that that’s happened?
HT: No. Look, I couldn’t comment on that and I don’t believe that is the case. So, you know, all I can talk about… I sat in the review obviously for the job a couple of weeks ago and I’ve been through a series of reviews. All I can comment on and talk about is what our strategy is and what we’ve done and, you know, we have two operating companies that have come together there with also a third partner, so we’ve got three companies sort of joined together as a joint venture for the first package that’s gone in and we’ve made our view on labour and productivity.
RG: Have you reached an agreement with the unions in this?
HT: No, we haven’t because we haven’t been awarded the project.
SB: Hamish, to get back to that issue of cost escalation and how it might apply to Leighton, you’ve got a very large exposure to the resource sector. All the big miners are now trying… saying they’re going to claw back the cost escalation they’ve experienced over the last few years and they’ve all said this will have implications for their contractors. Have you been affected by that and do you think you might be?
HT: We have been affected both in a positive sense and a negative sense. I think, you know, part of reducing costs it doesn’t mean self reforming it. One of the advantages that Leighton has is the economy of scale and utilisation, our buying gains across things like fuel, tyres, spare parts, equipment, the cost of our funds. So, in many cases, you know, if people want to do contract mining, they come to us actually because it is a cost effective solution. We’ve seen since the iron ore price dropped and then started recovering, we saw the award of Solomon Mine with Fortescue which was a significant win for us and a re-entry back into the iron ore business. Our gold mines are all doing very well. As far as thermal coal yes we are seeing pressure which you’d expect as the commodity price comes down, but if we look longer term, we believe that the energy demand remains strong and will continue to grow both for LNG and thermal coal through the Australiasian region and Australia, you know, has good deposits. We regularly see our clients reducing fleet size and increasing fleet size. You’re going to see that continue. It has… One of the advantages for us is it actually reduces our capex demand going forward, so we can allocate our capex and our balance sheet to other areas of the business that we can get returns. So, you know, we have a diversified portfolio that inherently within that diversification assists us to manage these cycles as different commodities come up and down.
RG: Hamish, the miners tell me and I tell everyone that in terms of constructing new mineral benches our construction costs are too high. We’re not competitive anymore. And I think part of that is your fault. It’s partly their fault. We have brought forward a whole series of labour rates and practices similar to desalination but not the same, if you like, but just simply aren’t world competitive. The governments are trying to tackle this with guidelines, but surely you’ve got to take some responsibility for that.
HT: Probably if you look at, you know, are we profiteering by this? You only have to look at our results.
RG: Oh no, I don’t think you’re profiteering. I think it’s the agreements you’re reaching with the labour force that’s the problem, not the profiteering.
HT: Look ...I said before, I don’t believe that the labour is the only issue in productivity. There are all sorts of issues that come in to the environment that we operate in – the logistics, the remoteness of projects, the accessibility, the regulatory environment, compliance, whether it’s environmental constraints, acquisition… land acquisition, you know, tax, there are so many things that come in to productivity. And if you look at Australia, Australia is a significant exporter of commodities and it remains so due to our proximity. There is an issue, there’s no question as resources get more and more scarce, of bringing some of these resources to the market and the costs of the infrastructure and the capex is huge and how does that get recovered and some of those projects at the moment are not feasible as a result of that. But we’ve got to a really good benchmark on productivity that exists not just in Australia but in all the markets that we operate in. We operate across 23 different countries and we know what productivity we get out of people in different regions and where the cost base is and we will take our services, whether it’s in Australia or whether it’s into places like Indonesia and India, Mongolia and the Middle East. We’ll export our core competencies to where projects are viable and where the market needs us.
RG: To the extent that it’s labour productivity that is the problem – I accept that it’s not the only thing – then you can use your skills in other countries where the labour productivity is not a problem.
HT: Look, we… I think what you’ve seen over time is modulisation going on which is a way of obviously dealing both with a skills shortage as well as productivity or costs issues, but it’s not just driven by where you’re focusing on, which is labour productivity, and I think Leighton… we’re a large employer. We’re probably the first largest employer in the nation and we do a lot of training and support and create a lot of jobs for people and I don’t want, you know, for a moment for people to think that we don’t appreciate the effort of our skilled tradesmen and our workers because at the end of the day the quality of what we produce in Australia is really world class and exceptional.
SB: Hamish, last question. You’ve talked about phases within your strategy as stabilising the group, rebasing it and then growing it. Where are you in that timeline? How will a rebased Leighton differ from the old Leighton and where do you see the growth coming from?
HT: First of all, where are we in the timeline and the journey? It is a journey. You know, we’ve statused in the presentation that we’ll be getting today where we are with a lot of the key initiatives and you can see we’ve made huge progress over the last twelve months. We still have a lot to do over the next twelve months, as we’re positioning for a growth future. Where will the growth come from? We continue to see the driver being the urbanisation andthe growing prosperity within the Asian region not just in China, so our growth largely comes from providing support and the resources to the growth we’re seeing in our region. And across the countries we operate in, we’ve probably got a GDP of six, six and a half per cent, so you know we’re seeing a doubling of those economies over a 10-year period. And the other thing that we’re seeing is a huge deficit in infrastructure. Globally there’s almost a trillion dollar infrastructure deficit last year due to fiscal constraints of governments, so those fiscal constraints must be navigated through by government, they must tap into private money and look at ways of recycling their own capital and delivering infrastructure and so the growth will come in in servicing the infrastructure deficit that’s out there and providing services to the economies in our region that are growing.
SB: Hamish, thank you very much for your time. We do appreciate it.
RG: Thank you.
HT: Thank you. Appreciate it. Thank you very much.