Time for a Leighton leadership purge

I am afraid there are likely to be much deeper problems in Leighton than were indicated by chief executive David Stewart in his presentation to shareholders. And because Leighton dominates almost all areas of Australian commercial construction, much of the $140 billion in Australian resource projects plus major infrastructure like the NBN, bridges and freeways are in danger of being forced to pay the price of Leighton's mistakes.

Leighton's Brisbane tunnel losses stem from a bad tender that did not forecast the problems that would be encountered working underground. The losses incurred at its Middle Eastern operations are the result of venturing into a boom area at the end of the boom. These losses are painful but they are once-offs and don't affect the rest of the country.

But in the Victorian desalination plant tender Leighton made a mistake of an entirely different nature. Leighton managers agreed to a labour contract from hell which gave virtual control of much of the hiring to unions that had bad past records; awarded enormous pay rates, which according to The Age can vary from $200,000 to $300,000 a year with a large tax free content for some employees, and provided for all sorts of holidays and bad practices.

Given that Leighton is the largest Australian contractor, not unreasonably unions are demanding that the wage and work practice precedents set at the desalination plant be extended to all major jobs in Australia, so lifting their cost substantially. And if Leighton does not "do the right thing” and extend the desalination precedents to all new contracts then it can expect plenty of curry in all its works.

Indeed in a skilled labour shortage, Leighton and many other contractors are now starting to write the potential cost of the desalination precedents into their tenders (IR ghosts of Leighton past, April 11 – and make sure you read The Conversation).

Resources Minister Martin Ferguson (who is a former ACTU president) yesterday warned unions not to extend the 30 per cent wage rises they have secured on offshore oil and gas projects into the mainland because it would affect the economics of a big slab of the $142 billion Australia has in resource projects, including Queensland's onshore gas (Unions must cool wage demands: Ferguson, April 11).

But the desalination plant has well and truly brought those rises to the mainland, and worse still has created a control structure precedent that locks in low productivity so, in effect, the real pay rises are much greater than 30 per cent.

What disturbs me is that in the official Leighton presentation the only recognition of the mess is the statement "labour productivity on the project (is) significantly less than budget”. "Labour productivity” is a euphemism for union trouble but in this case the impact of union trouble was substantially caused by bad management which lead to a bad agreement.

In the official Leighton presentation, one of the future risks that directors isolate is that they will fail to lift "labour productivity” (ie, end union trouble) in the desalination plant.

As the desalination contract nears completion and with the big penalty clauses hanging over the company, union trouble and low productivity are likely to get to get worse as the "cost of peace”.

This is not the first time Leighton has signed such an agreement. They did the same thing with the Southern Cross railway station in Melbourne, and again incurred well deserved losses. However, the company clearly did not purge itself of the bad management culture which simmered below the surface during the years when the Australian Building and Construction Commission kept a strong control of rorts in the commercial building area.

The ALP disemboweled the power structure at ABCC so Leighton was back on its own having learned nothing.

But it gets worse. The Leighton subsidiary John Holland, which had not done a deal from hell with the unions, actually tendered a lower price for the desalination plant than Leighton's other construction subsidiary Theiss. But the Victorian government took the higher tender to look after its union mates who had secured this amazing deal from the Theiss Leighton subsidiary. Leighton also gave some iron clad price guarantees.

Had Holland won it would also have hit weather problems but on its own those weather problems didn't cause a $280 million reverse with the likelihood of more to come.

It's easy to blame former chief Wal King for all this. It's true that in his final years he was part of the problem, but it goes much deeper. There is a big cultural difference between John Holland and Theiss, with its 'give the unions what they want because we can add it onto the price' management style. But John Holland got caught not picking the underground terrain problems in building the Brisbane tunnel. Australia has a lot riding on which culture emerges dominant in Leighton.

The mining projects in the pipeline are now likely to face costs that are far beyond what was expected unless Leighton can quarantine the precedents at the desalination plant. Some of the resource projects could become uneconomic because of higher than expected capital costs.

The first project to be hit was the NBN, where tenderers wrote in some of the desalination precedents. While there were also other big issues, an important factor in the NBN going ahead will be Leighton or someone else finding a way to circumvent the desalination precedent problem.

This is a case where the unions are not simply the baddies. The unions have understandably exploited appalling management. Leighton needs to purge that management for its own sake and for the sake of Australia.