Construction inquiry. Why is building so expensive?

VICTORIAN Premier Ted Baillieu's campaign for an inquiry into construction costs and productivity has finally paid off. The Council of Australian Governments will appoint a panel to review the industry, with wide terms of reference, including workplace relations.

But in a significant shift, the review will be carried out by "three eminent independent people", as yet unnamed, rather than by the Productivity Commission. Unions opposed giving the commission the role, accusing it of bias.

Instead, the panel will be appointed by COAG so appointees will require bipartisan agreement from the Labor federal government and Liberal state governments and comprise people with "relevant legal, industry, workplace relations and economic expertise".

It will report back this time next year after examining:

. The changing market structure of the construction industry, including openness to foreign suppliers.

. The cost of compliance with regulations.

. The impact of taxes and other charges.

. The roles of skilled labour supply and shortages, industrial relations and project management.

Other issues such as allocation of risk, availability of finance, and new technology.

Mr Baillieu said he would have preferred a Productivity Commission inquiry but the terms of reference were satisfactory and its value would depend on who sat on the panel.

"We want to ensure that the three of them are experienced, and they are independent, and they don't have any vested interests," he said. Victoria would oppose unions having a representative on the inquiry.

The timetable envisages the panel being appointed next month, with a secretariat of Commonwealth and state officials set up by September. A discussion paper would be released by the end of the year, and a final report delivered by July 31 next year.

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Why BHP wants to be free of unions

BHP Billiton has one key goal in demanding reform of industrial relations law: it wants its managers to be free to manage the business as they see fit.

The issue is not primarily about wages, or productivity, but power. BHP wants to get the unions out of its decision making.

In the wake of BHP chairman Jac Nasser's broadside on Wednesday against the Fair Work Act, the mining tax and Australia's high-cost economy, Employment Minister Bill Shorten hit back, blaming BHP itself for its problems.

"If a company is struggling to persuade its long-standing workforce of the case for change, then perhaps the problem isn't just the law, maybe it's the way the case is being put, and the engagement of the workforce," Mr Shorten said.

The ACTU Congress condemned "BHP's pursuit of safety deregulation, that would transfer vital safety roles from qualified workers on the job to management". It declared support for the 3500 coalmine workers in Queensland's Bowen Basin in their 18-month campaign of industrial action against the BHP Billiton Mitsubishi Alliance (BMA).

BHP sees it differently. The list of complaints in its submission to the review of the Fair Work Act is mind-numbing in detail. Most relate to just one of its five key principles of industrial relations: "management's retention of the ultimate responsibility and right to run the business with employee consultation not elevated to a right of veto over operational decision making".

"BHP Billiton contends that the legitimate sphere of enterprise agreements is entitlements for employees in respect of their wages and conditions of employment," it says. The Fair Work Act, it argues, goes beyond that, to allow "interference with managerial decision making".

The submission was lodged in February, two months before BMA took the drastic step of closing its Norwich Park coalmine, in part due to industrial action led by the Construction, Forestry and Mining Employees Union over a proposed enterprise bargaining agreement.

The agreement, which would cover the mines operated by the BMA in central Queensland, offers annual wage rises of 5 per cent for the next three years, plus a production bonus of $15,000 a year. It was rejected overwhelmingly by workers at meetings last October. But a postal ballot approved by Fair Work Australia is now under way to seek a second opinion from workers.

In its submission, BHP lists 18 union claims in the dispute that it calls "beyond what is reasonable or necessary for the protection of employees".

They include union demands that:

Delegates be paid for time off to deal with member issues, attend union meetings, including preparation time for meeting conveners.

Delegates be able to use mobile phones at all times, regardless of safety rules.

Employees not be suspended during investigations into their conduct, or disciplined for breaching BHP's code of conduct.

Contractors and labour hire workers now most of BHP's workforce be paid the same as the minority of employees.

The submission goes well beyond that. BHP wants to be free to conclude individual agreements with high-income employees (such as miners). It wants to tighten the rules on pattern bargaining, union officials' right of entry, union representation and a dozen other issues.

The review, headed by Reserve Bank board member John Edwards who 20 years ago was point man for then prime minister Paul Keating in the reforms to introduce enterprise bargaining will hand its report to Mr Shorten by May 31.

Its terms of reference, however, aim to limit it to reporting whether the act is working as intended.

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Markets rocked by euro chaos

INVESTORS nervous about Europe and the slowing global economy have wiped $27 billion from the value of Australian shares - as the chairman of BHP Billiton warned that the nation's mining boom was winding down.

Sharemarkets around the world quaked amid growing speculation that Greece would be forced out of the euro bloc, triggering a new bout of global financial instability. In Australia, investors pulled their money out of shares, sending the market on its biggest fall of the year.

By the end of yesterday, the benchmark ASX/S&P200 index had plunged by 101 points to 4165.50. The Australian dollar sank below 99 US cents for the first time this year.

More than $75 billion has now been stripped from the value of Australian shares this month - mostly over Europe concerns, but also because growth in China and India has slowed, easing demand for our mineral exports.

Trade figures released last week imply that imports of capital equipment shrank in the March quarter, and have barely grown in the past six months. This suggests growth in business (mostly mining) investment is slowing sharply.

Yesterday's fall began as soon as markets opened in the wake of more bad news from Greece. Negotiations to form a new government failed again, forcing a second national election.

New data showed Greece's GDP shrank by 6.2 per cent in the year to March, amid reports that European and German leaders want Greece out of the eurozone, and are ready to risk a market meltdown.

There was a brief rally when new data showed Australian wages growth remains subdued - except in Western Australia, and in mining - but the market started falling again after BHP chairman Jac Nasser said the resources cycle had turned, and that BHP would shelve some of its planned projects.

''The tailwind of high commodity prices has contributed to record growth in the sector and the country,'' Mr Nasser said in Sydney. ''Now we have a period where those tailwinds are moderating, and we expect further easing over time.

''The resources business has always been, and will always be, a cyclical business.''

Asked if BHP still planned to invest $80 billion over the next five years, he responded: ''No.''

In a politically charged speech, Mr Nasser, the Melbourne engineer who became Ford's global chief, called for a new wave of industrial relations reform, saying that in 2011 BHP faced 3200 cases of industrial action in its Queensland coal business alone.

He warned that Australia had become ''one of the higher cost countries of the world''. Its industrial relations environment was deteriorating, governments had hiked mining taxes and royalties, and investors had lost confidence in the future of the global economy.

''Those decisions have repercussions,'' Mr Nasser said. ''At BHP, our choices include in which product ? and in which country we choose to invest.

''Stable tax and appropriate industrial relations frameworks ? we will make progress if we focus on getting these two issues right.''

He censured Treasurer Wayne Swan for his attacks on mining billionaires, and urged him to create ''a stable, predictable and competitive tax framework''.

''I cannot overstate how the level of uncertainty about Australia's tax system is generating negative investor reaction,'' Mr Nasser said. ''I don't think it is good for Australia when global investors question openly whether Australia really wants a globally competitive resources industry.''

But the slide in the dollar is giving relief to thousands of Australian businesses, as it was mostly the dollar's rise that made them (and BHP) high-cost.

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Construction costs too high to build things

FOR me, the penny dropped in the 2010 state election campaign. John Brumby pledged to replace the level crossing at St Albans with an underpass. Treasury put the cost at $165 million - for one underpass.

Melbourne has 175 level crossings. Most are on main roads. Andrew McLeod, former CEO of the Committee for Melbourne, warned that unless they go underground, the inevitable expansion of peak-hour train services in future will shut down those roads in peak hours. And 175 times $165 million is almost $30 billion.

Melbourne's population has doubled in the past 50 years, and is on track to double again in the next 50. To house it, we will need to build more than a million new dwellings. If they are to be, as the Grattan Institute puts it, ''the housing we'd choose'', most will be apartments, units and semi-detached homes in existing suburbs. We will build up.

If such a city is to be liveable, it will need to build a metro. It will need new freeways, wider roads and new infrastructure of all kinds. We will have to build, build, build.

But how can we build all this if it costs $165 million to replace one level crossing? Our construction costs, according to the Business Council of Australia, are now 40 per cent higher than those in the US, let alone in Asia. Construction costs in the past decade grew twice as fast as inflation.

Folks, we have a big problem. As Premier Ted Baillieu put it last week: ''Escalating construction costs are pricing us out of infrastructure.''

We pay for the infrastructure. We suffer if the housing we'd choose is unaffordable, or is not built because it would cost more than buyers can afford to pay, or if the infrastructure we need is not built because it costs too much.

We suffer if building costs are out of control. That is why we should welcome the Baillieu government's moves to try to bring them under control.

Two weeks ago, it introduced a construction code for state projects, aimed at achieving ''behavioural change on Victorian building sites'', and stamping out the union rorts that made the Wonthaggi desal plant a $700 million loser for its builders.

The code requires builders with state contracts to enforce the law on right of entry and freedom of association, and ban strike pay and over-award payments. Nigel Hadgkiss, former deputy head of the Australian Building and Construction Commission (ABCC), will head a team enforcing it.

Last week, Baillieu got Julia Gillard to agree to a Productivity Commission inquiry into why Australia's construction costs are so high. Former ACTU president Martin Ferguson, now Minister for Resources and Energy, recently voiced alarm over Australia's declining construction productivity and ''significant cost increases'', including a 24 per cent slump in productivity at one firm.

No one pretends that there is only one problem to fix. But one problem must be fixed if infrastructure and medium-rise housing are to be affordable.

The culture of Victorian building sites must become productive - and not, as at Wonthaggi, one of extorting wages and perks that are out of line with those of the workers who pay the bill.

Construction consultants Napier and Blakeley report that on building sites general labourers cost $75 an hour - including overheads - and high-value tradesmen $85 an hour. They work 36-hour weeks, receive 26 rostered days off on top of normal leave, and when it's wet or hot, they walk off on full pay. And they've just won a pay rise of 27 per cent over four years - with no trade-off to lift productivity.

Why do builders give in? John Lloyd, former head of the ABCC, now with the Institute of Public Affairs, says it's partly the nature of the industry, and partly that some builders hope that it will secure workplace harmony - often in vain.

''Contractors bear the risk and face the penalties if a project goes over schedule,'' Lloyd says. ''They operate on small margins, so they become vulnerable to industrial action and delays.'' In the short term, it's in their interests to give in.

What sort of industrial action? Industry sources say it includes go-slows, raising phoney concerns about safety, interrupting concrete pours, even sabotage. Once a contractor has been burnt by these tactics, the hint of a repeat can induce compliance.

Developers say the ABCC, set up by the Howard government with sweeping powers, brought countervailing power to building sites. ''The unions pulled their heads in,'' says one. ''And since they faced heavy penalties, contractors became more frightened of the ABCC than of the unions.''

But Gillard is replacing the commission as watchdog with what Master Builders chief Brian Welch calls ''a chihuahua brigade'' from Fair Work Australia, with neutered powers.

The state ALP's industrial relations spokesman, Tim Pallas, says he is not convinced there is a problem with the culture on building sites, and if there were, it should be dealt with by an industry roundtable to try to win consensus.

But there is no consensus. Lloyd says the solution is to keep a cop on the beat for 15 years, until union leaders accept that the old ways won't work. This will be a long war.

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