Leighton's terrible timing

Leighton is already facing significant challenges as the federal government looks to break up its cosy and mutually beneficial relationship with unions on major projects. The corruption revelations couldn't come at a worse time.

Leaving aside the rights and wrongs of what happened with Leighton in the Middle East, the controversy has come at exactly the wrong time for Leighton.

Leighton management already faced a difficult time over the next year or two on the local market because of its cartel-style agreements with the building unions.

Irrespective of the truth of the allegations of corruption in the Middle East, once such accusations are made they tend to keep recurring and distracting management as new issues and allegations arise.

More importantly this comes at a time when the company will be required to change its local culture and management practices if it is to work for governments on major infrastructure projects. One of the secrets to the success of Leighton and Lend Lease is that they have agreements with the building unions that make it very difficult for competitors to make major inroads in the commercial building industry because, in effect, the unions approve the rules and who can be sub contractors.

Commercial building in Australia becomes a cost plus exercise with limited gains in productivity. It is very rewarding for both workers and shareholders but very expensive for those building infrastructure and commercial projects.

Those who have been following my commentary on this matter know that Victoria, NSW and Queensland have now all banned these types of agreements in their government work. In Victoria, Lend Lease has actually been banned from tendering for Victorian government work.

Now the federal government is set to place similar bans on such agreements as part of its reinstatement of the Australian Building and Construction Commission. And this legislation is likely to be approved by the Palmer party in the Senate.

As the states have found, because of the backlog of tenders it takes some time before the ban on cartel-style agreements takes effect. Indeed after it had been banned from government projects in Victoria, Lend Lease was awarded a Bendigo hospital contract because tenders had been called for before the ban.

At the moment the only major commercial builder who operates outside the cartel-style agreements is Grocon and it is the subject one if the most vicious union campaigns ever seen in Australia.

When the Federal government intervenes, similar industrial action is likely so commercial building will be a stormy scene.

But the storm will pass and if Leighton wants to continue to be a major player in the government work in Australia it will have to completely change the way it manages (What Lend Lease and Leighton shareholders need to know, December 19) and (Writing's on the wall for a Leighton showdown, August 15).

And it is even more serious for Leighton because its high cost way of dealing with unions has sometimes seeped into its mining operational contracts and so it has been replaced. The commercial building cultural change will have to spread thought the entire company.

That’s a big challenge for Leighton CEO Hamish Tyrwhitt and his people. They didn’t need the Middle East affair.