Lend Lease and Leighton need a new toolkit

Cartel-style arrangements between big builders and building unions are on the way out whether Lend Lease and Leighton like it or not. And speculation Dennis Napthine is easing off the issue is wrong.

If shareholders in Leighton and Lend Lease thought Victoria was backing away from its drive to bust the big builders' cartel-style agreements with the big building unions they are sadly mistaken.

The new Victorian Premier Denis Napthine has reaffirmed, in the strongest possible terms, the agreement with Queensland and New South Wales to bust the cartel-style agreements and substantially reduce the cost of infrastructure and commercial buildings.

Former Victorian Premier Ted Baillieu initiated a thrust to stop unions being able to approve who can be sub contractors and exercise major control of labour arrangements on building sites. In due course, and it will take a few years unless Lend Lease and Leighton change their management ways, both will be banned from tendering for government contracts in the eastern states and it is likely Western Australia will follow.

Lend Lease has already been banned from new Victorian contracts. The building unions and shareholders in Lend Lease plus some media outlets have been suggesting that Denis Napthine might be backing down when last weekend he allowed Lend Lease and partners to win the Bendigo Hospital tender.

But the Bendigo hospital was caught in the changeover. The tenders went out before the anti cartel-style measures were in place and the only other tenderer was Leighton’s Thiess which also has a cartel-style agreement with the unions. When the Lend Lease ban was announced last December (Lend Lease strikes out on an unholy union, December 18) and (What Lend Lease and Leighton shareholders need to know,  December 19) I foreshadowed that the Bendigo Hospital contract could be a problem.

New South Wales and Queensland will also encounter problems in their changeover periods. The Bendigo hospital contract is worth some $650 million and Victorian taxpayers will have to pay the cost of the anti-competive effects of the cartel-style agreement. In central Melbourne, this is normally 20 to 30 per cent of the contract price – about $120 million for the Bendigo hospital.

But Bendigo is 150km from Melbourne, so the cartel-style agreement cost to Victorian taxpayers will be much lower. The unions have a case in the courts for trying to maintain their powers in the cartel-style agreements with the big builders, and the federal government is also trying to help its union mates in the courts. But the governments in the three states will pass whatever legislation is required to save their taxpayers big sums.

In Victoria the plan is to split future contracts into smaller chunks so that smaller builders who are outside the cartel-style agreements can tender. And Tony Abbott is promising to ban the cartel-style agreements if he wins the September election. Many of Leighton's building union agreements expire in August – a month before the federal election and two months after the New South Wales and Queensland cut off dates of July 1, 2013.

If Leighton is to continue as a major builder on the eastern sea board its management will have to find a way to manage its work force without a cartel-style union agreement. Over time as more competition emerges among the sub contractors, and unions do not run the sites, costs will fall.

But the management of both Lend Lease and Leighton will have to develop entirely new skills if they are to operate outside the cosy protection of a cartel-style agreement with the unions.

Other commentaries on this subject

Labouring under an NBN cost curve, March 26

States align to bust building unions, March 25

Queensland hammers down on construction unions, March 20

Leighton builds a union bypass, February 14

What Lend Lease and Leighton shareholders need to know, December 19, 2012

Lend Lease strikes out on an unholy union, December 18, 2012

Who'll join Ballieu's construction revolution?, October 15, 2012

The changing state of Victorian construction, October 18, 2012

Lend Lease skirts Victorian building foundations, October 17, 2012

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles