The ABCC of construction chaos

Martin Ferguson and Simon Crean are two of Australia's most experienced government ministers. Yet this week they fell into the trap of telling only half the story by effectively blaming unions for making new mining projects difficult to get off the ground.

The Australian story is not just about unions. It starts with bad management at of some of our construction and mining companies.

Construction companies, led by parts of Leighton, have historically believed that they could give the unions the control and influence they wanted and pass the cost onto their customers. And it's been a very successful formula.

Miners, led by BHP Billiton, have enjoyed such rich ore bodies that they could adopt a similar strategy and as a result BHP iron ore mining costs in past decades were substantially higher than those of Rio Tinto, which had recruited much better managers and given them full board backing.

The construction companies knew governments and commercial property developers would pay the higher costs. However, faced with bad construction industry management and unions who knew how to exploit it, the Howard government stepped in and set up the Australia Building and Construction Commission.

The ABCC effectively put a rod behind weak managers by making many bad work site practices illegal. The ABCC was starting to bring down costs and would have achieved a reduction of at least 25 per cent. But then the Gillard government disemboweled the ABCC to make it completely ineffective, and strengthened union power with industrial relations legislation. The situation was made worse by the disastrous Victorian desalination plant agreement, which took bad practices to a new level.

Leighton will incur a well-deserved big desalination loss but the combination of no ABCC, weak managers, tough unions and the mining boom has caused the desalination practices to spread around Australia, boosting the cost of mining projects.

Crean and Ferguson have to start not by blaming the unions but by reimposing the rod behind the backs of weak managers.

In the absence of Canberra action, the Victorian government is taking the lead and duplicating many of the ABCC requirements on Victorian government projects. Yesterday the unions were out in force, which was a sign that the Victorian rod behind weak managers might work.

Given that Crean and Ferguson do not have enough clout in the Gillard government the rod will have to be imposed state by state. Leighton has a huge order book so will not be affected greatly in the short term but will find it very difficult to operate in any state where Victorian style measures are adopted.

The detailed background is provided by these past commentaries:

– Dodging mining sector mothballs (May 22)
– A mining boom cut-off is coming (May 21)
– Climbing out of a productivity quagmire (May 8).