Leighton's risky revamp

Leighton chief executive Hamish Tyrwhitt quietly dropped a bombshell on the large project construction industry over the weekend.

On the surface his announcement seemed innocuous – Mike Rollo has been appointed Leighton's chief risk officer, replacing Craig van der Laan.

But in elaboration Tyrwhitt explains that the Leighton ‘risk management team' has developed a comprehensive approach to the identification of high-risk projects. And so opportunities that are deemed high risk will now require the Leighton bidding subsidiaries to submit to Rollo "a bid strategy for approval before they can proceed to prepare and submit an expression of interest, let alone a tender”.

In his KGB interview (KGB: Hamish Tyrwhitt, February 22) Tyrwhitt indicated that Leighton was heading in this direction and related the new strategy to the problems which arose at the Victorian desalination plant and other Leighton loss-making contracts.

In the desalination plant tender, Leighton subsidiary John Holland submitted a bid that was lower than the bid submitted by another Leighton subsidiary, Thiess. But the Brumby Victorian government chose the higher Thiess tender partly because of the relations it believed Thiess had with the building unions. However, Thiess and Holland fought vigorously for the contract.

Holland and Thiess, plus Leighton itself, are the major Australian tenderers in big contracts and to date, even though the same company owns them, they have been genuine vigorous competitors. In the new environment, before Thiess, Holland or Leighton can even submit interest in a big job – and most big jobs usually carry high risk – they must get head office approval. This is clearly in the interests of Leighton shareholders and if I was Hamish Tyrwhitt that is what I would do.

But in the process he has just eliminated an enormous amount competition in Australia's big construction project sector. I can't imagine what the ACCC could do but they will doubtless look closely at what happens next.

The coordination of the risk approach of Australia's three major big project tenderers comes at a time when the changes to the industrial relations scene have made building unions far more militant and, as Hamish Tyrwhitt explained in his KGB interview, the act itself is causing a substantial addition to costs.

I am sure Hamish Tyrwhitt would say that the new Leighton strategy would not lift tender prices. We will have to see, but my guess is that the stage is set for a significant increase in tender prices in major jobs as distinct from smaller jobs, especially given the fact that in the eastern states many smaller builders are going to the wall.

Of course in Western Australia skills shortages are so great that costs are starting to explode way beyond what many miners expected. It will be high risk for groups like Leighton to submit fixed bids because of the rate of cost escalation.