States align to bust building unions

Unless they completely change their union agreements and their management techniques, Australia two biggest commercial building groups, Leighton and Lend Lease will, in future years, be banned from new government work in Australia’s three eastern states — NSW, Victoria and Queensland.

This follows a dramatic change of heart by NSW Premier Barry O’Farrell on Friday night. O’Farrell decided to join Victoria and Queensland to ban the cartel style agreements between big commercial builders and building unions from July 1, 2013 so that NSW can slash the costs of roads, hospitals, schools and other infrastructure buildings.

And the Victorian, NSW and Queensland bans will effectively extend to new private contracts so in effect the two companies and will require enormous change if they are to operate on the eastern seaboard. And because the looming cost savings coming to the three eastern states are so large my guess is that WA will soon join them.

For Leighton this could not come at a worse time, given the instability on its board.

For the unions it will mean that the “mother of all wars” will be declared as they seek to retain the power over building sites that the cartel style site agreements with big builders deliver. On the eastern seaboard, among the major builders, only Grocon operates without a cartel style agreement with the unions. Grocon therefore has a much lower cost base but the unions are desperately trying to put Grocon out of business including starving its projects of funding by threatening to switch support away from the Cbus superannuation fund.

However, if the big builder-big union agreements are busted then, in time, all three states will enjoy a fall in construction costs of between 20 and 25 per cent.

The end of cartel style agreements is the first step towards making construction of new mines in Australia economic. 

But NSW has effectively allowed a long period of grace so NSW taxpayers will have to “cop the costs sweet” for an extra year or two. But the complete change of direction in NSW is marvellous news for Australia at a time when there is chaos in Canberra. It shows states can fill the Canberra vacuum.

Late last year when NSW issued its draft commercial building rules it was clear that the government had been nobbled and there were huge holes. The draft guidelines were close to useless.

But once the NSW premier, Barry O’Farrell, realised what had happened, he stepped in and the new NSW rules are as tight as Queensland and Victoria. Now that NSW has come into line, a national Coalition government will seek to end the cartel style agreements around the country.

Former Victorian premier, Ted Baillieu, who did the hard initial state-based anti-cartel work, should be a national hero in the eyes of taxpayers but big builders and big building unions do not like him. Victorian rules came into operation on July 1, 2012. The duplicate Queensland and NSW rules will come into operation on July 1 2013.

Lend Lease even snubbed the Victorian government and around September 2012 — three months after the Victorian rules were introduced — signed a labour agreement that maintained a cartel style agreement with the unions that maintained union power. Baillieu then banned Lend Lease from new government contracts in Victoria.

Business Spectator readers will know that I have been following this unfolding drama for over a year and, at the end of this commentary, I will provide links to help those who want extra background.

In essence the cartel style agreements operate by allowing the unions to control all site labour agreements and effectively control who can be subcontractors. Accordingly there is no sub contractor competition and few productivity gains in commercial building (exactly the opposite is happening in home building where the cartel style agreements do not operate and sub contractor competition is driving huge gains in productivity). The current agreements allow the union people to be on site at all times to enforce the agreements. The unions have a large say on rosters and how the sites are managed. The new eastern states rules ban such practices.

In most circumstances the builders and sub contractors make good profits out of the current cartel style agreements because new entrant competition is restricted. Former prime minister John Howard banned the cartel style agreements but the current government reinstated them. And the Gillard government is even going before the courts trying to get Victoria to reinstate the cartel style agreements and restore union rights. Who cares about the cost?

Of course, if they are badly negotiated, cartel style agreements can backfire on builders. Leighton signed an agreement with the unions for the Victorian desalination plant, which greatly extended union power, and, with the new federal industrial relations legislation, not surprisingly Leighton suffered big industrial disputes and large losses.

The unions are demanding Victorian desalination contract provisions be extended around the country, which is further boosting costs.

Leighton and Lend Lease have large order books — including large recent NSW government contracts — which have been priced in accordance with the cartel style agreements so the new rules will not affect Leighton and Lend Lease for some time. But I believe the impact will come much faster than many think.

Barry O’Farrell declared, “the new guidelines stipulate how contractors who want to participate in publicly funded construction work can ensure they are complying with the law and reflect current best practice.

“They are designed to assist the industry to maintain productive and efficient construction sites, ensure state infrastructure delivers value for money for taxpayers and leads to job creation and economic growth.

“The Guidelines align NSW with contemporary arrangements operating in other jurisdictions such as Victoria”.

However, he added, “existing enterprise agreements approved by the Fair Work Commission prior to 1 July, 2013 will be deemed acceptable, but agreements approved on and from 1 July, 2013 must comply with the new Guidelines”.

In theory there could be efforts to prolong the cartel style arrangements well into the future.

But big builders who do that are not reading the play. Like Lend Lease in Victoria they will be punished.

Other commentaries on this subject

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