Writing's on the wall for a Leighton showdown

A Coalition government’s plans to boost infrastructure competition would put it on a quick collision course with Leighton’s new ‘growth by margins’ strategy.

Because Kevin Rudd is campaigning as Kevin Rudd Inc many of the nation changing policies that have been announced by Tony Abbott and the Coalition are not being discussed.

And so yesterday’s strategy statement by Leighton Holdings was ignored albeit it is an important signal for what is ahead in Australian infrastructure development.

I have already pointed to the lack of discussion about independent contracting and the extension of the fair contracts provisions that exist for consumers  in the area of smaller enterprises (Abbott’s red-letter day for enterprise, August 1).

But there is another enormous change looming for infrastructure. A large amount of the additional employment the Coalition plans to create will come from infrastructure construction – often funded by tolls or user pay arrangements. To slash the cost of that infrastructure and get more value for each taxpayer dollar, Tony Abbott is planning to give teeth back to the Building Commission and follow Victoria, New South Wales and Queensland in having detailed rules for government contracts. In essence these rules mean that the cartel style agreements between the big building unions and the big builders, which effectively lock out competition in sub contracting, will be abolished in government contracts .

The combination of the three states and the Commonwealth should be very effective although it will cause considerable industrial disruption.

Such a government action will mean Leighton, Lend Lease and most other major builders will require a different management style. But it will also mean that the cost of major infrastructure projects will fall by about 20 per cent.

Yesterday there was no mention of the current state or proposed Coalition legislation in the official Leighton stock exchange release. Leighton has a massive order book of some $40 billion and says that its focus is now “on achieving better operating margins, rather than expanding revenue at low margins”.

“We do not need to expand our book to deliver growth to our shareholders in the immediate future. Rather, we will optimise returns from the strong order book that we have while focusing on operating efficiencies,” it said.

I read that as saying that if governments want much lower infrastructure tenders via the new rules then Leighton will not play ball if it involves low margins. A big problem in lowering the costs is that Leighton and Lend Lease dominate construction in Australia and with a $40 billion order book Leighton can be patient in the expectation that its rivals will not be large enough to handle the work.

This is going to be a tense encounter if the Coalition wins the election.