Vigilance needed in Abbott's infrastructure push

As a minimum, Victoria is set to save a massive $5 billion -- and possibly more -- on its $27b infrastructure expenditure as a result of busting the cartel-style agreements between the unions and major builders. When the planned infrastructure investments for NSW, Queensland and other states are added, the combined Australian savings will be many times that figure.

Almost certainly the Victorian government incorporated major savings in its $27b expenditure estimate. I have used a conservative cost reduction estimate of under 20 per cent caused by preventing unions from approving subcontractors, restricting their right of entry to sites to prevent efficient construction methods being used. The community would not be able to afford the Australia-wide planned infrastructure but for the work first by the Victorian government followed by Queensland and NSW to establish clear rules in building contracts wars.

Now that will be firmed up by the Abbott government’s strengthening of the Australian Building and Construction Commission. Already its leaders, John Lloyd and Nigel Hadgkiss, are using existing legislation to make unions play by the rules. But when the infrastructure avalanche hits, Lloyd and Hadgkiss will need to be extremely vigilant to make sure that the unions and the commercial builders don’t go back to their old ways and find a way of jacking up the prices.

Already prosecutions have started because managers have allowed union officials to go on site without permits. Union officials are being prosecuted but if managers are found to be lax or complicit then the mangers and/or directors may also be required to face the courts. This is a serious business with large amounts at stake.

The task of Lloyd and Hadgkiss is particularly important given the significant ownership changes in Australian commercial builders in recent times. One by one, almost all of Australia’s commercial builders have become overseas owned.

The most significant change is that our largest commercial builder, Leighton Holdings, has become owned by the Spanish giant ACS. Leighton requires enormous management and cultural changes to move from the highly profitable cartel-style agreements to the lower-cost arrangements where unions do not approve subcontractors and do not have the same access to sites.

Meanwhile, Multiplex is now owned by the Canadian giant Brookfield, and Probuild is owned by South African based Wilson Bayly Holmes-Ovcon. Grocon doesn’t normally undertake major infrastructure projects but it is known that the Japanese have been casting an eye over the Grollo family company.

The only major Australian owned infrastructure builder is Lend Lease, but in 2012 Lend Lease signed an agreement with the building unions to perpetuate cartel-style agreements in defiance of the Victorian government rules. The Lend Lease board under chairman David Crawford is aware that the company must change its management ways but, like Leighton, it faces a tough task. At least it doesn’t have to cope with an ownership change at the same time.

In the past, Australian share investors would share in the profits from the size of the contracts on offer and the abundance of work. They now only have Lend Lease to invest in -- although don’t be surprised if the east coast infrastructure bonanza attracts new players because of the chance to really be efficient given the end of the cartel-style agreements.