Leighton builds a union bypass

The New South Wales ALP is in complete disarray, but the NSW building unions are showing that they no longer need the ALP. At the same time, in his interview with Business Spectator's KGB, Leighton chief executive Hamish Tyrwhitt explains how he is making internal changes in his company to restore it to a profit powerhouse (KGB: Leighton's Hamish Tyrwhitt, February 14).

And it's the giant $1.8 billion Sydney North West Rail link tender that shows how the new system will work.

Tyrwhitt does not comment on the labour contract details and emphasises (correctly) that Leighton will not do a deal with the unions on the North West Rail project until after the tender is decided. There are at least two others tendering for the project, including Lend Lease.

Down at union headquarters at Sussex Street the smiles on union officials' faces cannot be contained. It's true there is no North West Rail deal but unofficially each tenderer has been briefed in detail on what will be required in the labour deal. It will be an arrangement from union heaven including most of the high cost stipulations in the Victorian desalination plant contract. New South Wales unions are more sophisticated than their strike prone Victorian counterparts. There will be no strikes, just carefully timed go slows, which experienced tenderers write into their tender price. No tenderer would risk its enterprise by assuming it could arrange a better labour deal after winning the North West Rail project. Sussex Street has therefore set the terms so the labour costs in every North West Rail tender will be the same – priced at a rate that helps make Sydney the second most expensive city in the world.

New South Wales taxpayers can afford to pay the price but the Sussex street terms are on the way to making Australia uneconomic in new mining projects because it must compete on an open global marketplace.

There is no doubt that Leighton and similar builders have great skills in their workforce – it's just that those skills come at a high price, with little scope to improve productivity in that area.

Back when Wal King was Leighton's chief executive, Thiess and John Holland operations would have competed against each other for the North West Rail tender, as they did for the Victorian desalination plant.

Now Leighton's North West Rail tender is a joint venture between Thiess and John Holland. Tyrwhitt proudly explains that Leighton will gain non-labour productivity and other advantages by coordinating the skills of both arms. And Leighton is no longer interested in volume for volume's sake. It wants to make reasonable margins on all its jobs, and eliminating internal competition in high risk tenders is one way to do it.

If the labour rates in Australia or other factors mean that there is not sufficient work here then Leighton will use its skills in Asia where it believes it has a competitive advantage. Leighton will not be held back by the borders of Australia and while it expects lots of work in Australia it is no longer dependent on it – no lower margin/high risk tendering to keep the doors open will take place.

What about the Victorian building guidelines, which saw Lend Lease banned as a contractor? Leighton's current Victorian labour agreements were signed before the guidelines came into operation so it is not affected. Tyrwhitt says Leighton will only sign labour agreements in Victoria that meet the guidelines.

Tyrwhitt does not comment on the improvements such arrangements would deliver to labour productivity on building sites, but clearly the improvements would be substantial because there would be competitive bidding from a much wider range of sub contractors, not just the union approved list.

In theory, New South Wales is following Victoria but in practice it is not. The New South Wales draft guidelines are full of holes which jubilant unions believe they can exploit to help retain Sydney's status as the one of most expensive cities in the world to erect a building. Rightly or wrongly, the unions believe their mates among the big New South Wales builders have brought home the bacon.

In the New South Wales draft guidelines there are loopholes that do not exist in Victoria. For example in the New South Wales proposal, builders can still have bad practices in non-government work as long as the good practices exist in the government contracts. In practice that will never work and the unions know it. And it's also open for many ministers to declare that a job is too important for the state to worry about labour productivity. New South Wales taxpayers can and will pay, say, 20 per cent more for their buildings or infrastructure, but the jobs will be done.

In Victoria the cranes may lie idle. Leighton will obey the rules and believes there are many other ways to lift commercial building productivity other than labour agreements. And if it was to get too hard, there are huge opportunities to further use its skills in Asia.