Employers could be lost in dark legal tunnels

Substantial commentary on the Fair Work Bill is now on the public record.  Lines of division have emerged, expressed by key players in the public debate.

First, it's clear the 575-page bill is complex.  No business or employee is going to be able to read it and achieve a simple understanding.

The bill has a number of complex interrelated clauses governing single issues.  The explanatory memorandum doesn't help much.  It states there will be adverse economic impacts but doesn't discuss how these will happen.

In many respects the bill possesses dark legal tunnels down which businesses will have to travel without clarity.  This will create commercial uncertainty.  For example, it introduces a new concept concerning content in enterprise agreements.  Agreements will be able to include anything to do with the relationship between employers and unions.  This is interesting.  Employers that don't have contracts with unions yet now have a "relationship" by statute decree.  What does this mean and where will it lead?

Pattern bargaining is supposed to be outlawed.  Yet the clauses governing wage setting for "low-paid workers" have led many to the conclusion that back-door pattern bargaining will operate for this group.  Further, the bill doesn't define low-paid workers.  Businesses can only guess if they'll be included in these provisions.  Uncertainty again.

Enterprise bargaining is touted by the government as key to driving needed productivity.  Certainly during this protracted economic crisis, productivity improvement is vital to containing, limiting and emerging from a slump.  The new "good-faith bargaining" rules may make enterprise bargaining unhelpful in the productivity stakes.  These new rules are foreign to Australia and introduce unknowns.

Good-faith bargaining is all about process not outcomes.  Businesses will not formally have agreement content they don't want forced upon them, but the obligations dictated in the process could have the same outcome.  Some say Fair Work Australia, the new controlling authority, may be able to order the stopping of outsourcing, as an example.  What this would do to businesses exploring efficiency and productivity improvements no one knows.  One group that will be served by the bill is lawyers.  They are in the game in a big way.

Already, legal firms have been pouring out commentary and each firm suggests it has a full understanding of the bill, or better still, knows how to turn it to business (or union) advantage.

It's predictable that, particularly in the early stages of implementation, considerable legal testing will occur.  This will stretch over several years.  High Court cases settling interpretation are probable.

Still, the bill has to pass the Senate.  Submissions are due to the Senate inquiry by January 9.  The debate is set to be significant.  The Australian Hotels Association and Australian Chamber of Commerce and Industry are opposing parts of the bill.  The Australian Mines and Metals Association has been strident in opposition.  Other influential players such as the Australian Industry Group, Housing Industry Association and National Farmers Federation have so far been constrained in their commentary.

The federal coalition is somewhat caught by its past and identifying its future.  This is what the government clearly wants and it is how it is politically punching.  Every time the coalition suggests problems with the bill, the government throws the mantra of Work Choices back in its face.  The government seems intent on making the election in late 2010 a Work Choices scare rerun.  No doubt this is the union strategy.

Finding its distinct defining position on workplace issues is central to the coalition's future.

It's an issue at the core of Australian politics.  Hoping it will go away will not work.  Its first step makes sense.  The opposition spokesman, Michael Keenan, has announced the coalition will hold the government to its election promises, pointing out areas in the bill that were not election undertakings.

If senators Nick Xenophon and/ or Steve Fielding take a similar approach, amendments could be in play.  What matters ultimately is how the bill assists or hinders constructive workplace relations and business outcomes.

International commentary has so far not been good.  The Wall Street Journal has slammed the bill, citing legal costs, loss of productivity and less employment as predicted outcomes.  This makes the bill a bad look for international investors contemplating allocation of extremely scarce financial resources.

Indicators are that the Forward with Fairness debate is about to move from posturing to substance.

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Radical reform needed to clear up the telco mess

Telstra's exclusion from the bidding process for a national broadband network reinforces how much of a fiasco Australian telecommunications policy really is.

The Labor Party's high-profile promise that it would have in place by November 2008 a fibre-optic network was supposed to outflank the regulatory stagnation that had developed since Telstra first announced its plans to build such a network in late 2004.

Communications Minister Stephen Conroy clearly had no idea how difficult and entrenched the regulatory problems were.

The latest decision sets a terrible precedent for a minister with an already poor reputation.  The Government is claiming the Telstra proposal was rejected because the company had not included a detailed plan to involve small and medium enterprises in the network's construction.  The first striking thing about this requirement is just how extraordinarily micro-managing it is.  Does the Government want the fibre-to-the-node or not?  Surely voters don't care whether their broadband network is built by big companies, little companies or robots subcontracted by aliens.

Nevertheless, it is hard to avoid the impression -- and certainly this is Telstra's view -- that being excluded over this odd requirement is nothing more than a convenient excuse to kick Australia's biggest telco out of the running.  After 11 years of forced access regulation, there is a lot of bad blood between Telstra, the industry, the regulators and, of course, the Government.

This decision signals a government willing to make decisions based on animosity rather than neutrality.  Big Australian companies will be quickly learning how important their Canberra lobbyists are under the Rudd Government:  with a resurgent industry policy, an emissions trading scheme with more exceptions than consistencies, and a steady program of commercial bail-outs, it has been a long time since having the ear of a minister has been so important.

The Government can't claim to be concerned about the influence of lobbyists in the halls of Parliament while making it impossible for companies to do business without them.  The problem facing Australia's communications industry is deceptively simple.  The original regulatory approach was to try to inject some competition after the industry's partial deregulation.  And so Telstra was forced to allow its competition to access the copper wire network, and at a price set by the ACCC.

Yes, Australia has seen an explosion of small telcos.  If competition is a synonym for hundreds of companies selling pretty much the same product, then regulators can declare victory.  But the more important point of the forced access model was to encourage companies -- after they had a comfortable foothold in the industry -- to build their own networks.  That has not happened.  Instead, Telstra's competitors have invested more and more of their own resources into the ageing copper-wire network.

And when the idea that we need a new network comes along, it creates a perfect storm.  Telstra isn't sure how the access regime will be applied to a whole new network on which it wears all the financial risk.  Telstra's competitors are disgruntled because suddenly all their expensive equipment will become obsolete, and mortified by the prospect of being unable to compete with a flashy new network.  The Government doesn't like copping public criticism from a company that used to be its political stress ball, and the regulators would prefer it if they could issue orders unchallenged, as they could before.

With stakeholders at each other's throats, the industry is unable to build the network.  But this is no market failure by any definition of the phrase;  it is a failure of the Government's regulatory policies, which discourage investment in infrastructure.

It must be easy for politicians to imagine that a government could magically fix problems by throwing money at them.  But yesterday's exclusion of Telstra from the broadband tender indicates that the Labor Party might find our regulatory mess a trifle more complex to deal with.

The forced access framework has, ironically enough, cemented Telstra even further into the centre of the telecommunications industry.  It will take radical reform to fix the telco mess.  Governments are going to have to step back from micro-managing the telecommunications sector.  Market forces need to determine the shape of such a quickly developing industry, not regulators.

More land does not mean cheaper housing

House builders and land developers have welcomed Spring Street's decision to allow more land to be used for housing on Melbourne's periphery.

All restrictions on urban growth raise the cost of housing.  But, with regulations, everything is relative.

As pointed out by industry representatives like the Urban Development Institute's Tony De Dominico, the Victorian Government's land release policies have been less harmful than those of other states.

At the same time as Victoria was announcing a relaxation of development restraints, Queensland was moving in the opposite direction.

The Queensland Government shifted land previously earmarked for housing out of the urban footprint.

Queensland has seen skyrocketing home prices because its regulatory policies have reversed the pro-development approach that prevailed in the 30 years to 2000.

That approach transformed Queensland into Australia's fastest growing state.

Now it has spiralling house prices and a regulatory squeeze on development land, bringing plummeting new-housing starts.

Such a dismal picture has long been evident in New South Wales, where its basket case economy makes a mockery of its "Premier State" moniker.  Although having considerably more people than Victoria, NSW is building only half as many new houses.

Average house prices in Sydney are one-third above Melbourne's.  That's because the NSW Government inflates house prices by preventing land being used for housing then slugs the new homeowner with punitive taxes, masquerading as infrastructure contributions.

Infrastructure contributions are wrongly named.  Land developers actually pay for housing infrastructure, passing on the costs to home buyers.

Governments claim that they incur additional costs for new development in trunk roads, schools, etc.  Such claims are no more true of new than existing developments.

At best, infrastructure charges are simply taxes that seize some of the excess costs created by government planning regulations.

The Property Council estimates that infrastructure taxes in Sydney amount to $80,000 per house -- and that's on top of stamp duties and land taxes.

The Victorian Government is also jumping on the infrastructure tax bandwagon, though less greedily than other jurisdictions.  It is applying a $95,000 per hectare infrastructure charge.  This works out at $6000 to $10,000 per house.

But additional costs emerge from the "beauty contest" nature of the approval process.  To get the tick, development applications have to offer environmental set-asides, open space and other land-intensive uses.

This diversion of land from housing means higher costs per home.  It typically loads $20,000 onto the cost of a new house.

Planning regulations drive up house prices by restricting land-use on the urban fringe and hindering redevelopment in inner areas.

They were introduced by pretentious intellectual elites who want to see densely populated cities.

The upshot of over-priced houses needs to be addressed to enable houses once again to become affordable for young people.

This means progressively abandoning quantitative restraints on land-use for housing and removing the many regulatory costs that impede land development.

Importantly, governments should confine restrictions on new-home building to areas of exceptional environmental or scenic value.

After all, with only 0.3 per cent of the state urbanised, there is no shortage of open space.

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A Bad Climate Trade-off

The high priests of climate change are wrapping up their latest meeting today in Poznan, Poland, where the United Nations is hosting a conference on global warming.  But don't expect a real solution to emerge.  While most of these politicians and negotiators concur global warming is a man-made problem, there is still fierce opposition to the quickest method for spreading man-made solutions: free trade.

Numerous technologies already are on the market or in development that can increase energy efficiency or directly reduce the volume of global emissions.  Solar panels provide an alternative source of power generation for countries currently dependent on carbon-dioxide-emitting energy such as coal.  Clean coal technologies can significantly reduce pollution from existing coal-fired power stations.  Fluorescent lamps can increase energy efficiency over traditional lighting systems.

But trade protectionism inhibits the international spread of these and other technologies, especially to high-polluting developing countries.  Low-carbon technologies are classed as "manufacture" and are treated as an industrial good on each country's tariff schedules.  Developing countries have high tariffs on industrial goods as a form of industry protection.  A 2007 World Bank study found that of four major low-carbon technologies -- clean coal, wind, solar and fluorescent lamps -- tariff and nontariff barriers can be as high as 160% among the top 15 greenhouse-gas-emitting developing countries.  Such products also face stiff nontariff barriers like quotas and import ceilings.

Even worse, many developing countries are now calling for compulsory licensing of patents on low-carbon technologies to reduce their cost.  Under this regime, governments ignore patents on these technologies and allow for local production or importation of knock-offs.  At last year's United Nations Framework Convention on Climate Change Meeting in Bali, Nigerian Environment Minister Halima Tayo Alao argued that patents are a "barrier" to transferring low-carbon technologies to developing countries.

In reality, compulsory licensing may give countries access to cheaper technologies in the short run, but in the long run, the incentive to invest in new technologies is diminished.  Patents encourage innovation by letting inventors profit from their hard work.  A World Bank report published in 2007 found that weakening patents will actually harm the transfer of low-carbon technology to developing countries.

Environmentalists, oddly, are supporting protectionists on both tariffs and patents.  Environmental NGO Friends of the Earth, for instance, has argued that tariffs on low-carbon technologies are necessary "to enable developing countries to build their own supply capacity in developing environmental products".  This is fundamentally mistaken.  Low-carbon technologies are in their developmental infancy.  Suggesting developing countries will innovate the next generation of low-carbon technologies is a fantasy.

Some leaders do recognize the problem.  The European Union and the United States have been leading the charge in favor of an Environmental Goods and Services Agreement which would separate low-carbon technologies from other manufactured goods on tariff schedules, paving the way for tariff reductions on these products.  It would also make it easier to spot and reduce nontariff barriers.  Unfortunately, these talks are making little progress.  Developing countries like Brazil and India fear that conceding too much in these talks will diminish their leverage in broader trade negotiations underway in the Doha Round.

Leaders in Poznan are talking loudly of the need to reduce global carbon dioxide emissions, but until they put their trade policies where their mouths are, it will be just a lot of hot air.

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Unions, not workers, the real winners from IR changes

The Australian union movement is probably the most aggressive in the developed world.  It moral table-thumps, insisting its position, and only its position, represents purity.  It uses and abuses international conventions from the International Labour Organisation and human rights bodies claiming Australian unions have the right to be institutionally embedded in the framework of government.

Australian unions claim moral authority based on their spin of historical events, both recent and from the far distant past.  And ultimately they allege that class warfare is the basic fact of the work situation.  They say that workers will always be exploited and only saved by the fever-pitch screeching of union class warriors.

In all this they pedal part truth and part lies.  Foreign construction workers in the Middle East for example desperately need union protection, but are sold out by their own domestic governments' frantically seeking repatriated foreign currency.  In Australia, "rogue" employers do operate in the construction sector, flouting safety laws and hiding behind phoenix companies to avoid payments to workers.

But let's get real.  Australian unions are not a bunch of holy saints.  They're rough, they're tough, they're savvy and they're rich.

They control some of the largest hoardings of money in Australia through industry superannuation funds.  They have well in excess of $1 billion a year in direct revenue of which they use a big chunk for one purpose, to promote themselves.  They often behave as badly and immorally as the businesses against whom they direct their moralistic tongue-lashings.

But let's get real again.  The Australian union movement is not one thing.  They have many shades and colours.  Many unions are highly professional, service-orientated, practical and commercial.  Some however are totally irrational, eating themselves apart with internal wrangling.  A small number are even evil in the true sense, giving legal and institutional cover to criminals within their ranks.

It is in this "real" context that industrial relations legislation must be assessed.

Yes, WorkChoices deliberately sought to remove unions from the core of the institutional protection of workers.  The Forward with Fairness legislation, now it has been revealed, rewrites unions back into the centre of the game.  Unions are touting this as the great victory of the workers.

But let's keep a balance.  This pendulum of class warfare is largely irrelevant to most work situations and workers.  We're all workers now, whether managers, shop floor operators or the self-employed.  The class warfare is primarily played out in the courts, with lawyers having revenue feasts.  The "game" is mostly one of legislative design over who has legal authority over whom.

The new legislation proves the point.  Historically unions derive their legal authority because they represent employees.  That's as it should be.  This legislation gives unions authority in their own right whether they have members or not.  It's a dramatic shift.  The power pendulum has swung wildly in the opposite direction to WorkChoices, with power not to employees but to unions.

There's more to come it seems.  Unions are campaigning hard to abolish the construction industry cop, the Australian Building and Construction Commission (ABCC).  The construction unions in particular are painting themselves as victims, claiming they have fewer rights than the rest of society.  It is not valid.  Yes they can be dragged in for interrogation but it is no different to the Australian Competition and Consumer Commission dragging in some business executive for conspiring to fix prices.  The powers are similar.  So why are they needed in construction?

It is all on the public record.  The 2003 Construction Royal Commission found the construction industry is a work environment of extreme bullying and intimidation.  It still happens that workers who are not unionist are kicked off sites and denied their right to a day's pay.  Honest workers are physically abused.  It is rough stuff.  It is all about monopoly control of labour in construction.  Criminal union elements collude with some big construction bosses so the bosses can force competitors out of the industry.

There is a code of silence controlled by fear that is anti-worker and anti-human rights.  There are plenty of honest union leaders outside of construction who know this is the truth but are powerless to stop the abuse.  The ABCC has strong powers of interrogation to break the code of silence.  It is slowly working, but take it away and fear and intimidation will rush back into the vacuum.

If we are going to be really moral in this debate, it is about the rights of workers, not unions or employers.  Workers have the right to be protected from thugs, whether the thugs are union stand-over merchants or devious bosses.

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Business plays the patsy

What are business organisations for?  Do they exist so their chief executives can sit on government advisory boards and have afternoon cocktails at the Lodge?  Or is their purpose to forthrightly represent the interests of enterprises and employers?  If the answer is the latter, then lately the performance of the nation's business organisations has been none too brilliant.

Nothing in Canberra is more predictable (and, in a sad way, amusing) than seeing peak industry associations giving wholehearted support to Australian Labor Party policies only to later complain when things don't go as planned.  As yet no business organisation boss has admitted to their membership:  "Oops, I got it wrong, we've been done over -- maybe next time I won't be quite so eager to ingratiate myself with the government."

Politically, full credit must go to the Prime Minister and his ministers.  Labor has played the business lobby brilliantly.

And it hasn't been too bad at managing the other lobby groups either.  A week ago Julia Gillard as Education Minister gave a press conference flanked by representatives of Australia's Catholic and independent schools.  Gillard handed over $28 billion, and in return the schools endorsed a national curriculum that hasn't been written.  Not even the ACTU gives Labor that big a blank cheque.  On two of the big issues of the Rudd government's first year -- climate change and industrial relations -- business has either gone missing or been complicit in the making of bad policy.

First there's the emissions trading scheme.  Exactly how bad it will be we'll know next week when the government releases its white paper on the issue.  The fact that no one knows how the scheme will operate and what it will do to the economy didn't stop business organisations from welcoming Labor's ETS plans before the federal election.

For example, yesterday the Australian Industry Group suggested the ETS should be delayed until the economy recovered.  It acknowledged that in the current environment the last thing any company needed was a new regulatory burden and an extra cost impost.  This is not what Ai Group was saying six months ago.  In July it was still hoping for a 2010 starting date.

Industry associations, analysts, and for that matter most of the Australian media, have happily embraced a remarkable double standard.  In the wake of the global economic crisis they've all demanded greater clarity and transparency from financial markets.  Rightly or wrongly, the claim is that a reason for the near collapse of the world financial system was because no one could understand the financial instruments they were buying and selling.  Yet the very same people who are demanding the world financial system be made understandable and predictable are also calling for the introduction of an ETS.

An ETS is many things but it is most definitely not understandable and its impacts are far from predictable.

Then there's industrial relations.  The impression allowed to be created by business organisations was that even though they would have preferred the coalition's industrial relations policies, on balance they could live with the Labor alternative.  The problem was that business didn't actually know what the Labor alternative was.  When business found out it was too late.

Kevin Rudd and Gillard flattered business by saying they would consult on the new legislation.  They kept their promise and they consulted.  Their strategy worked.  Business has been kept quiet and quiescent for 12 months.  What the business organisations didn't appreciate (or didn't want to appreciate) was that a commitment to consult is not a commitment to do anything.  Business can talk all it likes to Labor, but it won't change Labor's resolve to introduce good faith negotiating requirements, to allow pattern bargaining, and to authorise union officials to have unprecedented access to individuals' private records.

The only thing that will change Labor's mind is political pressure.  However the path of applying political pressure is precisely the path that the business organisations have forsaken.  Labor's legislation is likely to pass the parliament early next year.  If business wants to mount a political campaign against the legislation it has only a few months to do so.  In any case, complaints from business organisations sound somewhat hollow because for a year they've been telling their members and the public not to worry.

2009 is going to be a great deal more difficult than 2008.  We can only hope business puts in a better performance.

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Global warming blame game gets furry

So many things are blamed on global warming.  A quick internet search of reported repercussions just beginning with "p", includes psychiatric illness, puffin decline, plankton blooms, polar bears drowning, polar bears cannibalistic and polar bears deaf.

Last week another was added when Professor Steven Williams from James Cook University, said a rare white possum might have disappeared as a consequence of global warming.

After some research of my own I discovered the "the white possum" is more commonly known as a lemuroid ringtail (Hemibelideus lemuroid) and is usually a charcoal brown colour.

Professor Williams' concerns are based on a 0.6 to 0.8°C temperature rise in Australia over the last 100 years or so and not seeing any white possums during recent expeditions to the Carbine Tablelands in Far North Queensland -- a place which was known to have had some rare white-furred individuals.

Much of the possum species' known preferred habitat (high altitude Far North Queensland), is extremely remote -- places like Thornton Peak, at an altitude of 1,374 metres are difficult to access and treacherous to navigate particularly at night when the possum is active and thus most likely to be sighted.

Indeed it would seem the professor's concern, that this may be the first mammal to go extinct as a result of global warming, could be considered somewhat premature.

Published research on lemuroid ringtails has concluded the species is most at risk from "habitat fragmentation" because they were reluctant to cross roads or even powerline corridors.

Apparently, rope bridges can help maintain "social integration and genetic diversity" in such cases.

Given the white possum prefers high altitude regions were there aren't many roads, spending money on rope bridges may be no more useful than Professor Williams claiming we must do something about global warming.

I suspect future generations will look back and scratch their heads in wonder at the extent to which our scientists became so utterly captivated by the current global warming hysteria.

You can find a complete list of things caused by global warming at http://www.numberwatch.co.uk/warmlist.htm

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Victoria must position itself to dodge NSW fallout

Anyone who was living in Victoria in the early 1990s understands the pain of a severe economic recession.  Its severity was largely the result of the incompetent Cain/Kirner governments.  The Kennett government imposed harsh medicine, reversing the problems and creating a renewed Victoria.

Now, Victorians should look at NSW and be concerned.  There's an economic downturn in NSW created not just by an incompetent government but by a Government plagued by scandal and corruption.  They're in denial about the scale of the problems and there's no trigger for change.

Even before the global financial meltdown, NSW had entered a recession.  This happened around mid-2008 and now it's deepening.  Take retail sales.  If NSW is excluded, national retail sales have been healthy all year.  NSW has been in steady decline.  NSW unemployment is rising, whereas the rest of Australia is still steady.  A housing collapse in Sydney's western suburbs locked in some time ago.  NSW is significantly distorting the national economic picture.

The problem is government-created.  The Victorian Cain/Kirner administrations were incompetent but generally honest and uncorrupted.  The NSW Labor machine is absolutely different.  It's a pit of corruption with sex scandals ripping through the ministerial ranks and corruption and dirty deals embedded within the state public service and local councils.

It's all public.  The NSW Independent Commission Against Corruption is overloaded with work.  New scandals emerge regularly.

The NSW budget is out of control.  This year's planned modest surplus disappeared to become a near-$1-billion deficit.  But there's an accounting trick.

When the same cash accounting standards are used that the Commonwealth uses, NSW actually budgeted for a $6.2 billion deficit in 2007-08.  They hide the truth.  The true accumulated cash deficit between 2004-05 and 2006-07 is $8.9billion.

The NSW budget has been on a Cain/Kirner deficit trend for some time but the Government denies the scale of the deficit.

The former NSW Labor premier and treasurer, who were effectively sacked by NSW unions a few months ago, tried to apply some Kennett-like medicine.  Their proposed sale of electricity generation was rejected, triggering their sackings.  The planned sale could have brought cash for urgently needed new power generation and eased the budget pressure.  That's now dead, as are long overdue reforms to infrastructure such as the train and ferry systems.

The whole system of government in NSW needs a major overhaul if the economic direction is to go from negative to positive.  But the NSW Government is dysfunctional to an extent that is hard to imagine.

Effectively, NSW is not being governed as a parliamentary democracy.  The NSW Parliament gives the Government the trappings and appearance of democracy, but it is the powerful networks outside Parliament that exercise the real authority.

The NSW Labor machine's reach beyond Parliament is substantial.  It decides which MPs are ministers.  It effectively sacked the former premier and treasurer.

It controls a vast network of non-parliamentary, public service oversight committees giving it effective control of the functioning of government.  It's out of this process that the corruption emerges because public service integrity has been mostly neutered.

The consequence is an ossified form of government that functions to protect and fund entrenched interest groups.  This prevents hard budget decisions being made or structural reforms being implemented.  Inefficiency is endemic.  It causes economic decay and has induced a NSW homespun recessionary trend.

And to this can be added the rolling global financial crisis.  NSW is the financial hub of Australia.  Job losses in the finance sector are hitting hardest in NSW.  The scenarios are bad and becoming worse.  NSW constitutes about one-third of the Australian economy.  The NSW Government is causing a NSW downturn.  Collapsing tax revenues and the financial crisis are making the situation worse.

The Government is not in control of its own operations, let alone capable of correcting the corruption.

Reform is impossible.  The next NSW election is fixed for March 2011.  The most likely and unfortunate prediction is that NSW will continue to slide deeper into recession.  It happened in Victoria less than 20 years ago and the signs in NSW are worse now than they were then in Victoria.

This is not a situation over which Victorians gloat.  Silly rivalry is irrelevant.  Victoria benefits from a strong NSW.  But given current observations, Victoria needs to have strategies to protect itself from the inevitable economic spillover of a quickly declining NSW.

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Boom and bust the way of the West

There is a lot of gloom and doom around today.  Even very optimistic people are understandably shaken when they see George W. Bush, one of the most conservative presidents in the history of the US, presiding over the effective nationalisation of the banking industry.  And now it looks as if the same may occur with the automobile industry.

We face what could well be one of the most sustained and deep economic recessions since World War II.

The past 300 years is the story of the rise of two interlinked systems: the global capitalism system and a geopolitical structure resting on the power of first Britain and now the US.

And those 300 years have been marked by one financial crisis after another.

Even before the English began to dominate global markets, the Dutch suffered though the tulip bubble of the 17th century.  There was the South Sea bubble of the early 18th century.  There were the panics of the Napoleonic wars, followed by successive and intensifying panics and crashes during the 19th century.  Financial crises have continued throughout the 20th century and now into the 21st.

And none of those panics and crashes interrupted or fundamentally altered the liberal capitalist path of development.

It is possible, of course, that this time is different, but history gives us sound reason to believe that this kind of economic crisis does not mean the system is failing or has failed.  Indeed, economic crisis is intrinsic to the capitalist economic system.  It's not pleasant, but it is a regular and inevitable part of our lives.

This is because the essence of capitalism is change.  Capitalism constantly forces us to innovate, to do things differently, and as the economy changes we no longer understand it as well as we once did.

In the past 25 years we have seen a series of revolutionary changes taking place in financial markets.  We have seen extraordinary progress in the way information technology has been harnessed for the purposes of market trading.  There have been new kinds of securities developed.  The crisis occurred because market participants and regulators no longer fully understand how the toe bone is connected to the foot bone in an international financial crisis.

But none of this means capitalism has failed;  it means capitalism is succeeding.  The history of the world economy shows us that crisis and panic have been our teachers.  It is only through the study of past crashes that we have been able to understand risks and trade-offs in markets.  We will come to grips with our past failures and figure out ways to protect against the problems that have landed us here, at least until markets develop a new level of complexity that defeats us and leads to yet another meltdown.

Of course, this is not a very consoling message for those trying to figure out how to retire.

But there are many reasons to be optimistic in this grim world.

There is the catastrophic failure of Osama bin Laden and the movement he leads.  No doubt there will be more terrorist attacks; the war on terror is not yet won.  But the more Muslims have seen of al-Qa'ida -- its religious tactics, its military tactics and its political aims -- the more they have turned their backs on the movement.

There is the geopolitical rise of Asia.  Relations between the US and the key Asian powers -- India, China, Japan, Indonesia, South Korea, even North Korea -- are all much better than they were in 2000.  Asia is an emerging multi-polar system so rich, so big and so diverse that no country can realistically hope to dominate it in the way Germany, the Soviet Union or France tried to dominate Europe.

Then there is the enduring quality of American soft power.  Certainly, you can't enter a university without hearing about the end of American soft power, or open a book on foreign policy without reading about the fatal damage that Bush has done to US prestige across the globe.

Yet when Barack Obama was elected, Der Spiegel magazine in Germany plastered Obama's smiling face on its cover with the caption "The President of the World".  One little election turned around a lot.  That the US had a very open election and elected an African-American critic of the Bush administration had a powerful impact across the world.

Each generation has to reinvent the way it understands the world.  It has to take old values and transform them.  Indeed, if we aren't building a world that is more complicated and challenging than the world we were born into, then we are not doing our jobs.

But I think one thing we can say about the English-speaking world after the past 300 years is that, by and large, we get the job done.

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The Cost of Constructing the Commonwealth Games Village

Occasional Paper

Industrial Relations and the Struggle to Build in Victoria Supplementary Report

In November 2006, we released a report titled Industrial Relations and the Struggle to Build in Victoria.  The report demonstrated the huge extra cost imposed on the State of Victoria as a consequence of the lawlessness in the construction sector.  It was the first case study into the positive impact of the new construction "cop" -- the Australian Building and Construction Commission (ABCC).  The report conducted a detailed analysis of the blow-out in the costs of construction of the CityLink project compared with the Eastlink project that were directly attributable to the bad industrial relations practices that applied at CityLink.  The cost differential was assessed at 11.8 per cent.

This short report is a follow-up to Industrial Relations and the Struggle to Build in Victoria.  It reinforces and adds further weight to the findings of the 2006 report.  This report also forms part of our submission to the Wilcox Review into the ABCC.

Our conclusion is that Victoria (as a case study) needs the retention of the ABCC because it has proven effective in ensuring improved lawful behaviour in the construction sector.  It has also delivered substantial economic benefits to Victoria.

This analysis focuses on the cost of construction of the Commonwealth Games Village.  Our 2006 report stated the following:

The Commonwealth Games village was built with CFMEU workers and industrial agreements instead of using standard housing construction work arrangements which involve neither unions nor industrial relations agreements.  The Games Village, consisting of 115 permanent and 115 temporary housing units, was essentially no different from a standard housing development that would occur in Victoria, except for the temporary security and other Games-related requirements.  The 2002 budgeted cost for the project was $144 million.  The Government has not released comparative data but estimates indicate that the additional cost of the housing construction at the Games village was in the order of 25 to 30 per cent over and above normal housing costs.  This is consistent with comparative estimates arising from the Cole Commission inquiry into the construction sector.

This report reveals that contractual arrangements put in place by the Government of Victoria inflated the cost of the Games Village construction by 34 per cent as a result of industrial arrangements with construction unions.  In other words, if the Games Village had been built using normal housing contractors, the evidence indicates that the cost of the Games Village would have been 34 per cent less than the actual cost paid for by the taxpayers of Victoria.  The extra cost was around $50 million on the $144 million project.

THE CONTRACTUAL EVIDENCE

The Games Village construction consisted of two distinct contractual undertakings.  There was the major sector of the Village itself and an additional sector called the Heritage Precinct (see map).  The Heritage Precinct was required over and above the Village proper to accommodate more athletes and officials than had been originally planned.

Normal domestic housing was to be built to house the athletes in the Heritage Precinct.  This housing was to be sold by the developer/builder after the Games and the developer was to retain the proceeds from the housing sale.  The State of Victoria was to have access to the use of the housing accommodation during the Games at comparatively low cost.

The developer was a large Australian concern with construction activity in two markets:  the domestic housing market and the commercial construction market.

• The domestic housing market constructs housing using what is called a "cottage industry" process.  That is, large numbers of self-employed carpenters, plumbers, brick layers and so on subcontract to builders and developers to build houses.  The sector is large, well organised, does not have a union presence and does not operate under industrial agreements.  It delivers quality -- housing at affordable prices to Australians.
• The commercial construction sector builds anything more than two storeys in height, including apartments, commercial buildings and so on.  The sector is controlled by construction unions and is governed by industrial agreements which specify how construction is to occur.

Because the developer operated in both sectors, it was well aware of the cost differential between the two, and was accustomed to pricing jobs differently.

To get the Games Village built, the Victorian Government entered a Memorandum of Understanding with construction unions that the village would be built using a union workforce with construction union industrial agreements and practices in place.

Up until recently, it has been difficult to secure hard evidence about the exact cost differential the Victorian Government was prepared to accept for using union arrangements to build the domestic housing when compared with standard cottage industry arrangements.  That hard evidence is now available.

We have obtained a copy of the Heritage Precinct contract between the Government and the developer under the Freedom of Information Act.  The contract is complex but the analysis is as follows:

1. The Victorian Government contracted with the developer and, in effect, lent the developer the full amount of the contracted price.

2. Once the Commonwealth Games were finished, the builder was to sell the houses.

3. The developer was to repay the loan to the government.

However

4. The developer was only to repay 65.8 per cent of the loan.

5. The 34.2 per cent of the loan not repaid was to be retained by the developer as compensation for the additional costs the developer would incur over and above normal domestic housing (cottage industry) construction costs.  In the terminology of the contract these are called "compression costs".

6. The contract makes it clear that the additional costs are related to industrial relations undertakings and disputes as a consequence of the Government's requirement that the developer use union industrial relations arrangements.  Other costs were identified, but our analysis is that, other than some minor legal and design costs, all costs were tied to industrial relations issues.

The outcome was that, in its contract with the developer, the Victorian Government accepted that the use of construction union industrial arrangements added 34 per cent to the cost of the Heritage Precinct.  It is reasonable to assume that this cost escalation benchmark applied across the entire Games Village.  Hence the additional cost of the Games Village is 34 percent of $144 million;  around $50 million.

The following pages from the Heritage Precinct contract show

• Page 10:  Clause 6.2.2 (iii):  the requirement to pay back only 65.8 per cent.
• Page 7:  Clause 3.3:  "compression costs".  Particular attention should be given to clause (vi).

Contract cover page

Page 10 of the contract:

Page 7 of the contract

THE NATURE OF THE ADDITIONAL
INDUSTRIAL RELATIONS COSTS

When it comes to explaining why industrial relations agreements and construction union activity created greater costs it might be thought that it was simply because construction workers were paid more than housing (cottage industry) subbies.  This is not the case.  The cost differential is because of unnecessary inefficiencies in the construction sector that are, in effect, a rorting of the processes of work.  Examples of what happened on the Games Village explain how the additional costs arose.

WET WEATHER DISPUTES:

The approach to wet weather days in the construction sector is not based on common sense.  Rather, the construction unions apply a very technical approach to what is a wet weather day and require work to stop and construction workers to go home.  The Games Village was plagued by disputes over wet weather days.

Industry "rules" state that if it rains to a certain extent between 7 am and 11 am, the site is to be closed for the day.  At the Games Village, tools were often downed while site managers and unions engaged in deep "analysis" about whether or not the site was "wet".  While analysis occurred, no work occurred.  On many occasions the debate over "wet days" resulted in formal dispute procedures coming before the Victorian Building Industry Disputes Board.  Such formal disputes occurred repeatedly during July 2005.  Several of these disputes involved the tendering of evidence from the Bureau of Meteorology about the actual amounts and times of rainfall.

The pictures below show some such discussions and were used as evidence as to what constituted "wet" days.

SCAFFOLDING DISPUTE

In November 2005, the scaffolding contractor, Boral, notified building sites about safety concerns with some of its scaffolding which required checks on all of its scaffolding.  Scaffolding-related work at the Games Village was immediately halted pending the required checks being completed.  However, the construction unions banned all work on the site -- including work where no scaffolding was required.  The site had plenty of non-scaffolding work available that could have kept the workforce productive.

The "dispute", allegedly over safety, resulted in formal dispute hearings in the Australian Industrial Relations Commission.  In all, 18 days of lost production occurred on the site as a result of this dispute.

"UNION SAFETY OFFICERS"

In August 2004, a dispute occurred over the provision of a fully paid union safety official to be placed in the Heritage Precinct.  The site's employees were gathered by the union during a morning smoko and told that the site was closed and they were to go home.  The developer was not informed by the union about the demand before the site was closed.  The matter became protracted and became formalised as a dispute in the Australian Industrial Relations Commission.

CATERING

At least one site closure occurred because the union objected to the quality of the steaks being supplied in the site canteen.

Pressure was applied to employ the wives of unionists in the canteen.

END OF JOB UNION SHOP STEWARDS

When the Games Village was completed, two union shop stewards refused to leave the site and insisted on being given continuing work -- even though there was none available.  A union official arrived and for around half a day parked his car across the driveway of the site, thus preventing movement of goods into the site.  The State Government eventually agreed to employ the two shop stewards through a labour hire company undertaking other work.

IT ALL ACCUMULATES!  IT'S NOT ABOUT WAGES

The key to understanding the industrial relations inefficiencies witnessed at the Games Village, which were common and systemic across the construction sector, is that the cost is cumulative.  The formal identification of strikes does not give the full picture.  The greater cost lies with the constant creation of disputes about seemingly simple things that could easily be resolved with goodwill and common sense.  There is no reason for most of the disputes.  But they are applied as a constant pressure mechanism against the managers of construction sites.  This is what creates the inefficiencies and the additional costs.

THE VICTORIAN GOVERNMENT RECOGNISES THE COST

It is instructive that the Victorian Government recognises the cost and, in relation to the Games Village, was prepared to accept and pay the additional and unnecessary cost.  But the Government was also mindful that if these sorts of costs flowed on to the general housing industry, housing costs in Victoria would skyrocket.  In the Memorandum of Understanding for the Commonwealth Games between the government and the unions, the following clause exists:

The parties recognise and agree that, wherever the Village is built, the application of the VBIA (Victorian Building Industry Agreement) is not and will not be used as a precedent for the application of the VBIA to large scale urban development projects or housing unit developments constructed by the cottage housing sector of the Victorian building industry.

Submission to the Wilcox Review of the Australian construction industry reforms

Submission

PART A:  THE REVIEW

We pleased to respond to the Wilcox discussion paper concerning the intended abolition of the Australian Building and Construction Commission (ABCC) in January 2010 and the transfer of its powers to the specialist Building and Construction Division within Fair Work Australia (FWA).

The ABCC was set up in 2005 as a specialist construction industry enforcement body.  It was a key part of the recommendations of the Cole Royal Commission (2002-03) which found wide scale and systemic lawlessness in the construction sector across Australia.  The ABCC has been heavily criticised, particularly by construction unions who are most subject to law enforcement activity by the ABCC.  In 2007 the federal Labor Party made a commitment to close the ABCC and transfer its powers to a specialist division of FWA.  The review by Justice Wilcox is charged with recommending how the transfer should occur.  Justice Wilcox has issued a discussion paper inviting submissions.

1. THE PARAMETERS OF THE DISCUSSION

The discussion paper is robust and challenging.  Justice Wilcox intends this.  He says "I am deliberately provocative on some issues and open to discussion on them all".  It is within this context that we respond in a similarly forthright manner.

The Wilcox discussion paper operates on two levels:

• First, there is a superficial level where the Review exercise could appear to be an entirely technical one which does not question the appropriateness of the ABCC's tasks but rather asks how those tasks should be undertaken by a new specialist division within the new Fair Work Australia.
• The second, deeper level is more substantive.  The tone and approach of the discussion paper in many places gives the impression that the very reason for having the ABCC or a similar but reconstituted body, is under question.  This is probably what Justice Wilcox refers to as his intent to be "provocative".  Specifically, the discussion paper takes as given most of the major criticisms levelled at the ABCC by the union movement and many labour academics and politicians.  The allegations are receiving significant media coverage through union-funded, politicised, television and multi-media campaigning.  The allegations which the discussion paper seems to accept fall into three broad areas:
1. That the ABCC discriminates against unions and breaches Australia's International Labour Organisation treaty obligations, and that, as a result, unions are "victims" of the ABCC's powers and activities.
2. That the alleged productivity increases and economic benefits resulting from the activities of the ABCC are not real.  Justice Wilcox states that there is no "hard evidence" to support the claims of economic benefit.
3. That the activities of the ABCC diminish competition in the construction industry.

2. OVERVIEW OF OUR POSITION:  THE NEED IS TO PROTECT COMPETITION INSTITUTIONALLY

The government intends to deliver on its 2007 election commitment to close the ABCC and transfer its powers to a specialist division of Fair Work Australia.  At the same time, the government says that it intends keeping a "strong cop on the beat" in the construction sector.

We do not believe that the ABCC should be transferred to a specialist division within Fair Work Australia.  The problems and issues confronting the construction sector are not primarily ones within the jurisdiction of industrial relations law.  Rather, the problems revolve around commercial issues concerning the protection of competition and of consumers.

If the ABCC is to be closed, we believe that its powers should be transferred to a specialist division of the Australian Competition and Consumer Commission (ACCC).  We understand that this is not the election undertaking to which the government is committed and that such a proposition is outside the scope of the Wilcox Review.  But the election undertaking is fundamentally flawed policy.

The essence of the historical problem of the construction sector is that industrial relations laws and practices have been used as a cover by unions in collusion with some construction businesses to manipulate and rort competition for the purposes of securing market power.  Industrial relations practices have been used to thwart the purpose of the Trade Practices Act (that is, to protect competition) and to thwart the activities of the ACCC in enforcing the TPA.

The ABCC is modelled along the lines of the ACCC, albeit somewhat more strongly given that it almost has the powers of a standing royal commission.  The ABCC is not an industrial relations institution but rather an exceedingly strong institution for protecting competition.  The act of transferring the ABCC's powers to an industrial relations institution (Fair Work Australia) must inevitably result in an outcome where the protection of competition in the construction sector is substantially reduced.  It is consequently almost inevitable that the sector will return to the old collusive ways that destroy competition.

The challenge for Justice Wilcox in his review is to prove that, in transferring the ABCC's powers to Fair Work Australia, the FWA is capable of preventing and will prevent the destruction of competition in the sector.

We are strongly of the view that if the Building and Construction Division within Fair Work Australia has powers that are watered down from those exercised by the ABCC, the government's promise of keeping a "strong cop on the beat" will be empty words.

There are serious consequences if this occurs.  The construction sector is markedly more law-abiding, productive and competitive than it was before the ABCC commenced operations in late 2005.  The economic and social benefits delivered in three short years are substantial.  In his discussion paper Justice Wilcox denies that there is hard evidence to support the assertion that there have been benefits.  He is wrong.  If the powers wielded by the new "cops" are not nearly equivalent to those of the ABCC, the industry will quickly fall backwards into illegality, markedly lower levels of productivity and diminishing competitive standards.  The greatest impact will be on government-funded community infrastructure projects such as roads, schools, hospitals and the like, because of increasing costs.  As a result, the capacity of government to fund necessary social and economic infrastructure will be diminished.

3. THIS SUBMISSION

Within this framework, our submission falls in two parts.

The submission:

• Revisits the justifications for creating the ABCC in the first place and how its powers are part of an interlocked and successful programme to apply the rule of law and competition to the construction industry in Australia.
• Considers some of the technical questions raised in the discussion paper.

4. BACKGROUND TO THE ABCC

Set up in late 2005, the ABCC is the key institution designed to bring the rule of law to the construction sector.  However, it is only part of the package of reforms that were introduced to change the industry as a result of the findings of the Cole Royal Commission of 2002-03.  The Royal Commission found that the industry was beset by lawlessness.  In his discussion paper, Justice Wilcox supports the findings of the Commission.  He says:

However there can be no doubt that the Royal Commissioner was correct in pointing to a culture of lawlessness, by some union officers and employees, and supineness by some employers, during the years immediately preceding his report.  The evidence summarised in the report is too powerful to permit any other view.

Justice Wilcox thus appears to accept the fact that, before 2003, the construction sector operated in an environment of competition destruction.

To overcome the lawlessness the government introduced a set of interlocked measures.  These include:

• Limiting the reach of agreements:  Banning clauses from industrial instruments that extended the control of instruments to commercial matters.  Known as "prohibited content rules" this stopped, for example, an enterprise agreement dictating from where a company was permitted to buy other services.  This was/is intended to break the control that unions, for example, could exercise over the supply chains that fed the industry.  A typical example was where industrial agreements required builders to purchase their window frames from only specified suppliers.
• Using the government's commercial influence.  Ensuring that all builders who wished to undertake government-funded construction work had to comply with the Commonwealth's Code of Conduct for the construction sector.  This was specifically intended to use the Commonwealth's major position in the market as a purchaser of construction services to apply commercial pressure to construction firms to ensure compliance with the law.  With government-funded construction constituting around one-third of all Australian construction, the government is in a powerful commercial position to require adherence to the law.
• Control of worksites:  Creating limitations and controls on unions in terms of their capacity to control worksites.  This involved limits on their right to enter construction sites without approval, limits on legal strike activity, and so on.
• The role of the ABCC:  The ABCC is the enforcement lynchpin acting as a specialist institution that patrols the industry, checking and enforcing adherence to these and other laws.  Its powers are broad and sweeping.  The activities of the ABCC can only be assessed within the context of the interlocking package of laws it is required to enforce.  The union multi-media campaign against the ABCC presents the ABCC as if it is a law unto itself and uncontrolled.  This is false.  The ABCC operates in a very similar manner to, and with similar controls over it to, the Australian Consumer and Competition Commission an (ACCC) and the Australian Securities and Investment Commission (ASIC).  The only difference between the ACCC, ASIC and the ABCC is that the ABCC has direct constraining impact on the lawless behaviour of unions in the construction sector, hence their objection to the ABCC.

PART B:  HAS THE ABCC BEEN SUCCESSFUL?  IS THE CONSTRUCTION SECTOR MORE LAWFUL AND COMPETITIVE THAN IT WAS BEFORE THE ABCC?  IS THERE "HARD" EVIDENCE?

5. THE POSITION OF JUSTICE WILCOX

In his discussion paper, Justice Wilcox says that there is no hard evidence to support the contention that the industry post-ABCC is more competitive and productive than before.  He also suggests that it cannot be proven that the clear and demonstrated reduction in lost days due to strikes post-ABCC can be attributed to the activities of the ABCC.  We disagree, asserting that there is substantial hard evidence on each of these points.  The question from our perspective is not whether the evidence exists but whether the evidence is accepted as valid or not.

Justice Wilcox has sought to be provocative.  We believe it is therefore appropriate to respond in like manner.  The Wilcox Review needs to face a challenge.  If the evidence that we assert is available, is nonetheless rejected, where is the hard counter-evidence that the industry is not more productive and lawful post-ABCC?  Do the critics of the ABCC assert that the construction industry remains unlawful?  Or do the critics assert that improvements in the construction sector have come about for reasons unrelated to the activities of the ABCC?  If so, what are those other reasons?  Justice Wilcox does not canvas these counter-propositions in his discussion paper.  They need to be canvassed.  For completeness and balance it is incumbent on the Wilcox Review to seek such opinions from opponents of the ABCC.

From our point of view, the rejection of the evidence of improvements in the industry by some parties since the ABCC came into being has strong political rather than analytical motivation.  This observation does not apply to the Wilcox Review or to Justice Wilcox himself.  The observation is that unions and individuals who most benefited from the lawlessness that preceded the operation of the ABCC are using political campaigning and political relationships to facilitate a return to lawlessness for the purposes of favouring their own positions.

We assert that hard evidence about the benefits for the construction industry, the community and the wider economy is readily available and should not be discounted.  We have gathered the following evidence.

5.1 The Struggle to Build in Victoria:

In November 2006, we conducted our own comparative analysis of the differences in the construction sector after the ABCC started operating and produced a report, The Struggle to Build in Victoria.  We case-studied Victoria, taking two major comparative construction projects as our starting point.  We compared the construction of the City Link project which was built pre-ABCC with the construction of East Link, the industrial agreements for which were heavily influenced by the pending start-up of the ABCC and whose construction mostly occurred post-ABCC.  We identified a projected, comparative saving for Eastlink of $295 million on an overall construction budget of $2.5 billion, representing an 11.8 per cent productivity differential.

We then summarised a wide range of pre-ABCC Victorian projects that had demonstrated losses as a result of lawlessness in the construction industry.  We were able to assess productivity and cost implications for the State of Victoria, and found that the benefit of the construction reforms to the Victorian budget over a ten-year period would be in the billions of dollars.

Our study has been heavily criticised by construction unions.  We include the study as part of our submission and as representing "hard evidence".  We are available to discuss this in more detail and provide supporting documentation.

5.2 To Build or Not to Build:

In October 2007, we organised a conference, To Build or Not to Build, to look at the construction sector and the differences in the sector post-ABCC.  We had presentations from:

• Master Builders Association of Victoria
• Troubleshooters Australia
• Chamber of Commerce and Industry Western Australia
• Australian Constructors Association
• Econtech
• Master Builders Queensland
• The ABCC
• Blake Dawson Waldron

Each organisation presented "hard" and compelling evidence of the substantial improvement in the productivity of the construction sector across Australia.  We assume that most of these organisations will be making their own submissions to the Review, but to ensure that there is clear "hard" evidence available, we submit copies of each of the presentations as part of our own submission.  The evidence is compellingly strong and consistent.

Our report, The Struggle to Build in Victoria, evidence from the ABCC and evidence from Econtech have all been attacked by the CFMEU (in particular) and others in the union movement as not being valid.  The attacks that we have seen have not focused on the detail of the evidence but rather have been little more than political attacks from parties whom the Cole Royal Commission identified as the market rorters in the sector.

We are surprised to see, however, the readiness with which the discussion paper seems to dismiss so lightly the evidence presented by Econtech, for example.  If this "hard" evidence can simply be dismissed as irrelevant, it raises the prospect that the bar which Justice Wilcox has set in order to be satisfied that hard evidence is indeed hard, is so high as to be impossible to hurdle.

5.3 The Commonwealth Games Rort:

In order to provide further evidence, we have undertaken an additional research project.  In The Struggle to Build in Victoria, mention is made of the additional costs associated with the building the Commonwealth Games facilities.  We have sought to verify this information further.  Through FOI requests, we have obtained detailed Victorian Government costing and contracts related to the Commonwealth Games Village.

The Games Village required the construction of normal domestic housing for use by the athletes during the games and for sale after the games.  Instead of the houses being built by the housing sector, they were built under industrial agreements and conditions applying to the construction sector.  Adjusting for the variations required for the Commonwealth Games specifications, the contracts obtained under FOI reveal that an additional cost of 35 per cent was added to the contract cost due to the fact that construction processes were used rather than domestic housing processes.  Our report is attached as part of this submission.

The outcome was that the taxpayers of Victoria paid 35 per cent more than they should have for this normal domestic housing construction.  This cost differential cannot be ignored or simply dismissed.  To dismiss such evidence is irresponsible.

6. CONCLUSION ON THE HARD EVIDENCE

We believe that evidence is available which clearly shows that the activities of the ABCC have produced large productivity gains and economic benefits for the construction sector and the Australian economy and community.  The ABCC has only been operating for less than three years.  This is insufficient time for its full impact and benefits to be felt.  But the "hard" evidence cannot be ignored or discounted.

Having made a contribution on the "hard evidence" issue, we now seek to address the core policy issue.

PART C:  COMPETITION IN THE CONSTRUCTION SECTOR

7. UNDERSTANDING THE CONSTRUCTION SECTOR FROM THE PERSPECTIVE OF COMPETITION POLICY

This submission argues that the Australian construction sector needs specifically tailored regulation to ensure that a competitive market can function in the sector.

We have actively studied, observed and commented on the construction sector for almost a decade.  We make judgements about the construction sector in terms of the extent to which it functions as a competitive market.  We see this as the core issue that must be addressed in contemplating the dissolution of the ABCC and the transfer of its powers to FWA.

Our observations and studies bring us to the conclusion that the sector has not functioned as an optimally competitive market in the past.  In fact, the construction market was a primary example of a failed and malfunctioning market.  It was typified by high levels of illegal behaviour -- in particular, collusion designed to prevent or minimise competition and to deliver market power to the colluding parties.  Further, it was this endemic market collusion that formed fertile ground upon which lawlessness, including criminality, flourished.  The Cole Royal Commission to which Justice Wilcox refers exposed this.

The Cole Royal Commission report should not be read as a commentary on an industrial relations environment.  It is more accurately a forensic dissection of the ugliness which follows when a competitive market is rorted by collusive, monopolistic-orientated behaviour to the extent that the sector ceases to function as a competitive market.  Construction was, in effect, a controlled market, a market controlled by "inside" players for their own benefit and to the detriment of the consumer and the wider community.

These inside players consisted of some unions and union officials in collusion with some construction companies and some construction executives and managers.  Ordinarily, such collusion would be illegal under the Trade Practices Act.  Given current proposals to amend the Trade Practices Act, such collusion could become punishable by imprisonment.  But, in the construction sector, the Australian industrial relations systems and IR laws were used to mask the collusion, thereby giving it a veneer of legality.  In actuality, the Trade Practices Act and the ACCC were effectively neutered, rendering them incapable of taking action against market manipulative collusion.

The process was sophisticated and complex both in terms of its execution and the subterfuge involved.  In its simplest form, it worked something like this:

• Tenders for a construction job (road, building, mine or other) would be advertised.
• Bidders would place their bids for work in what appeared to be an open bidding process.
• Bidders would be assessed not solely on price but on their capacity to undertake the construction successfully.
• Some bidders would have close working relationships with construction unions.  These unions and builders entered industrial agreements that effectively set a floor under the price of the tender.
• Those construction companies that had union agreements would only compete between themselves on the marginal issues above the floor.
• If a non-union construction company won the tender, unions would use on-site or off-site violence, intimidation and disruption to building supplies to make sure that the company could not deliver the job within budget and on time.  Such intimidation and disruption was designed to cause, and succeeded in causing, companies to go broke.  Alternatively, they forced the companies into deals with the unions.
• The violence and intimidation was always undertaken by comparatively small bands of criminal elements in or associated with the unions and was directed at building workers and construction managers.  From the union perspective violence against construction workers was necessary to ensure that union disruption of construction activities could be enforced at whim.  Violence and intimidation against construction managers were necessary to ensure that they complied with union instructions.
• Eventually, in market segments where this process worked, only companies with union agreements and relationships could or would put in bids for work.  This suited the companies because it limited competition against them and maximised their capacity for profit.  Effectively, cartels formed between the companies that maintained "good" relationships with unions.
• As the cartels became entrenched in their market segments, relationships between union officials and company managers ceased to be oppositional but instead became bonded.  Companies head-hunted union officials to work for them.  Executives' careers were built around the relationships in the cartels.  The distinctions between some unions and companies became blurred.  Unions would receive regular and direct payments from companies, effectively bribes.  Payments would be made to union "Christmas picnic" funds or union-run "training" schemes, "redundancy" funds and the like.  Highly placed union officials would "buy" company-built apartments at "bargain" prices.
• The seediness of the corruption and collusion knew no ends.  It was all possible for one reason.  It was masked and made "legal" through industrial relations arrangements.  The cartels met and organised the market manipulation in "industrial relations negotiations" meetings.  The agreements were sanctioned and made "legal" through industrial relations agreements which, in many if not most cases, gave legal sanction to union intimidation.  The agreements frequently operated across entire industry sectors.  None were hidden.  They were all open, blatant and public.

There were some companies that tried to defy the system from time to time, but they would be put out of business.  Some companies in some market segments successfully defied the system, but such acts of successful defiance were isolated and relatively limited.

The system was not created overnight.  Indeed, it evolved over generations to such an extent that it became entrenched behaviour and part of the construction sector's culture.  The culture included a code of silence.  Everyone knew that the collusion occurred, knew where it occurred but would never speak the truth because everyone had become commercially involved in the collusion.  The lines between normal and acceptable legal market behaviour and illegal collusive activity completely disappeared.  The Trade Practices Act could not operate effectively in the sector because its application was consistently blocked through jurisdictional play in industrial courts.  Because collusive activity was technically defined as an "industrial matter" any legal action was confined to industrial courts where the matter would be sanctioned.  The ACCC's powers were not and remain insufficient to override the jurisdictional reach of industrial courts.  The police were largely incapable of acting against violence or intimidation for exactly the same reason -- except in the most extreme circumstances.

What is critical to understand is that, even though the construction unions were the primary operators of the system, they were not solely responsible.  With the construction sector the collusion was only possible because some companies and many executives willingly and eagerly participated.  In fact, the primary commercial beneficiaries were senior union officials and selected senior company executives.  And they were untouchable.

The Cole Royal Commission detailed the operation of the collusive system.  As detailed as it was, the Commission could not and did not expose everything, because the industry's code of silence frustrated the investigations.  But the Commission did recognise that the essential problem was one of collusive market behaviour that manipulated and delivered market power to certain players.  The Commission's recommendations, which were adopted almost completely, sought to leave as its heritage a regulatory system and enforcement process that would break the back of collusive behaviour and prevent its re-emergence.

The package is as described earlier:

• Significant limitations were placed on what could be included in industrial agreements.  This was primarily designed to prevent industrial agreements and the legal processes of the industrial courts from giving intimidation, violence and collusion its legal mask.
• Use of the Commonwealth Government's commercial clout as a dominant purchaser of construction services to ensure the industry's adherence to free-market processes.
• Limitations on the entry rights of unions to worksites to constrain their capacity to engage in intimidation and violence.

The ABCC is the policeman charged with enforcing the free-market regulation system.  The Cole Royal Commission recognised that the ABCC would need unusually strong powers if the industry's collusive behaviours were to be changed.

For this reason, the ABCC is modelled very much along the lines of the ACCC and ASIC because its purpose is to prevent collusion and protect competition.  It is not an industrial relations "umpire".  It is a competition and market protection institution with considerable powers.

Chief amongst these powers is the much-criticised power of the ABCC to require people to attend interviews or face jail.  This power was recommended and given to the ABCC as a key tool for breaking the code of silence in the sector.  Anyone called in to interview cannot be prosecuted over information they give to the ABCC.  What this power enables the ABCC to do is to draw a broad sweep of individuals into interview with respect to any particular issue or incident.  The information that is given is confidential.  Because they must attend an interview, every individual is given protection when they tell the truth.  Effectively, no-one external to the ABCC knows who has said what.  This means that unions do not know who may have "ratted", and union-collusive company executives are equally ignorant.  The code of silence was mostly enforced by company executives who would either shut off managers' careers if they spoke out or deny work to subcontractors who spoke out.  Without the knowledge of who may have told the truth, a new code of silence, controlled by the ABCC, has descended on the industry.  This time the silence works to promote competition, rather than work against it.

8. HAS THE ABCC MADE A DIFFERENCE?  WHAT OF THE FUTURE?

The ABCC has only been operating for three years.  It should not and could not have been expected that the package of reforms would have transformed the industry in this period.  What is surprising is the degree to which change has happened.  Justice Wilcox denies that there is hard evidence of change.  We have stated that we believe him to be wrong.  We are surprised by the high quality evidence that has become available so quickly which demonstrates the changes.  But we believe that this change is only the beginning.

To change market-rorting behaviours and deep-seated cultures that have developed over generations takes time.  Three years is not enough.  For real and lasting behavioural and cultural change to occur, ten years would be a more realistic timeframe.  We believe that the government is making a serious mistake in abolishing the ABCC.

The ABCC should be retained for at least another two years as is, then be subject to review based on the state of the industry and retained for another five years.  At the end of ten years, the dissolution of the ABCC could be contemplated, with its absorption into the ACCC conditional on the requirement that the ACCC had the powers to prevent the re-emergence of such industrial relations masking of collusion.

Our belief and prediction is that that the absorption of the ABCC into Fair Work Australia will inevitably result in the re-emergence of systemic, collusive, anti-competitive market behaviour in the industry.  FWA is intended and designed to be an industrial relations management institution.  It does not and will not have as its brief the protection of competitive markets.  There is nothing to indicate that the ACCC is, or will be, any better placed than it has been in the past to stop collusive behaviour emerging under the mask of industrial relations law.

The industry will go backwards relatively quickly.  Construction unions are waiting to reassert their dominance and intimidation.  Some construction executives and companies are likewise waiting to regain the market collusive capacity they enjoyed in the past.

That being said, however, the task of the Wilcox Review is not to question the intent of the government to transfer the ABCC's powers to FWA but rather to comment on how and what powers should be transferred.  We turn our commentary to some of the technical issues that Justice Wilcox asked to be addressed.

PART D:  KEY QUESTIONS/ISSUES
FROM THE WILCOX DISCUSSION PAPER

The following list is our summary of issues raised in the discussion paper.

9. THE DISCUSSION PAPER ASKS IF THE COMMERCIAL CONSTRUCTION MARKET DISPLAYED MARKET FAILURE SUCH THAT IT REQUIRED SPECIAL INTERVENTION.

Yes.  As explained in our earlier discussion on the operations of the construction sector, the sector was a prime and extreme example of market failure.  Its failure as a market was immense.  As such, it required specialist, dedicated attention from a powerful regulator.  This was the key lesson from the Cole Royal Commission.

Is this still the case?

The change in the construction sector has been substantial such that a competitive market has now found a capacity to function.  However it is dependent on the continuation of the ABCC (or like body) enforcing laws that allow the market to function.  It is still early days in the change process.  Behaviours have changed but need to change further.

10. THE WILCOX DISCUSSION PAPER SAYS "MANY PEOPLE, ESPECIALLY IN THE UNION MOVEMENT, BELIEVE THERE IS NO NEED FOR A SPECIAL BODY TO POLICE THE BUILDING AND CONSTRUCTION INDUSTRY"

They are wrong.  The construction unions are a prime, though not the only, reason for the market failure that has occurred in the sector.  The key problem was the manipulative collusion that occurred between construction unions, some union officials and some construction executives and managers.  The collusion was sophisticated using the industrial relations system and laws as a mask for the collusion.  This situation would re-emerge quickly if dedicated enforcement was reduced.  A specialist body modelled along the lines of the ACCC is required and, if not a specialist body, it should be a well-armed and dedicated division of the ACCC.

11. THE DISCUSSION PAPER ASKS IF THE BCII LAWS ARE DISCRIMINATORY

To the extent that the laws target the construction sector for the purposes of preventing market manipulative collusion, the laws treat the sector unlike other sectors.  It is not surprising that some who are being targeted for their market manipulative collusive behaviour would argue that they are being discriminated against.  But this is a linguistic sleight of hand intended to paint the perpetrators of collusion as victims and to garnish public sympathy for the removal of the ABCC and its powers.  If there is discrimination, it is practised by those who act collusively in the construction sector when they engage in discrimination against persons acting lawfully in that sector.

12. THE WILCOX DISCUSSION PAPER RAISES THE ALLEGATION THAT THE BCII LAWS BREACH ILO CONVENTIONS ON FREEDOM OF ASSOCIATION. (P8)

Justice Wilcox says, "The ACTU complained to the ILO that the BCII Act ... breaches two ILO Conventions that Australia has ratified.  The former Coalition government disputed this claim."  Without drawing a definitive conclusion as to whether ILO Conventions are breached by the BCII, Justice Wilcox lays out in some detail reports made to the ILO Governing Body which he says the Governing Body "supported".  There are several points to be made in this respect.

We understand that the report to the Governing Body of the ILO by one of its committees was an interim report only and formed the basis for further investigation.  The committee report was instigated by the ACTU.  The ILO is a body that applies exhaustive investigative processes before coming to final decisions.  The allegations made by the ACTU are allegations only and the Governing Body has agreed that the allegations should be further investigated.  This is reasonable and proper for an international body that needs to make sure it has investigated fully.  Allegations should not be dismissed lightly.

However, the Conventions of the ILO, including the Freedom of Association Conventions, are framed in such a way that they must be considered by the ILO with regard to the specifics of national circumstances.  In the context of the BCII, the specifics relate to the unique Australian circumstances of the market manipulative collusion operating in the construction sector and the findings of the Cole Royal Commission.  It is therefore apparent that the ILO is in the process of considering the operation of the BCII.  Views are being considered but no conclusion has been reached in this respect.

Justice Wilcox has not reached or suggested any conclusion other than that ILO Conventions should be adhered to.

It is also important that the ILO position should not be misrepresented.  We believe that this is the case in this instance.  Far too often the good name of the ILO is used for the purposes of moral posturing, even when the posturing is not warranted.

There is nothing in the BCII or the activities of the ABCC that restricts the right or ability of construction unions to organise lawfully.  There are restrictions on the ability of unions to organise unlawfully.  For example, unions can hold meetings and enter worksites.  Meetings can be held offsite or on-site with appropriate notice and approvals.  What construction unions cannot do under the BCII is have the ability to enter sites at whim and roam around sites as they see fit.  Entry and access to building sites must be subject to appropriate safety arrangements and workers on sites have a right not to be approached by unions if they do not wish to be approached.  Building unions claim that if they do not have unrestricted, at-whim access to building sites and all parts of a building site, that they are therefore restricted in their right to organise.  This is nonsense!  Unions further claim that such restriction is a breach of ILO Conventions.  This is an illegitimate interpretation of ILO Conventions and of the position of the ILO itself.

13. HAS THE CULTURE IN THE INDUSTRY CHANGED SUCH THAT THE PROBLEMS EVIDENCED BY THE COLE ROYAL COMMISSION ARE NO LONGER EVIDENT OR OF LESSER EXTENT?  (P 4)

We believe, as discussed earlier, that there is hard evidence that the problems evidenced by the Cole Royal Commission have diminished.  However, we do not believe the problems have been purged from the sector.  It is clear that attempts at intimidation and collusion are still being made and require continuing policing.  Considerably more time is required before it could be said that the laws and policing of the laws following on from the Cole Commission have fully worked.  There is much more improvement that has to be made in the sector.  The pervasiveness of the culture is such that were the laws to be removed or weakened, the industry would return to its old behaviours with some speed.  The ABCC and existing laws would need to be retained for about ten years for their full impact to be realised.  Only then, after review, could consideration of closing the ABCC be contemplated.

14. SHOULD THE COMMONWEALTH EXERCISE ITS COMMERCIAL POWER IN THE MARKET PLACE TO LEVERAGE THE INDUSTRY INTO LAWFUL BEHAVIOUR?  WILCOX SAYS "... IT (THE GUIDELINES) MAY SERIOUSLY BE AFFECTING COMPETITION IN THE CONSTRUCTION SECTOR ..." (P14)

Yes, the Commonwealth should use its commercial power to require lawful behaviour.  The suggestion that a requirement to comply with the Code of Conduct Guidelines adversely affects competition is like suggesting that a requirement to comply with work safety laws adversely affects competition.  Certainly companies that don't comply with work safety laws may achieve an apparent capacity to tender for work at lower cost.  But ultimately, the cost will be borne by injured workers.  Likewise, non-compliance with the Guidelines could potentially give some companies a competitive advantage in tendering.  But the Guidelines are designed specifically to ensure that the Commonwealth benefits from a truly competitive market.  If a tenderer does things that reduce competition, the Commonwealth pays through a less competitive commercial environment.

As the largest single consumer of construction sector services, the Commonwealth has a duty to the taxpayer to use all its commercial leverage to ensure that the construction sector market is a free and competitive market.

15. ARE THE CLAIMED ECONOMIC AND PRODUCTIVITY BENEFITS RESULTING FROM THE CONSTRUCTION REFORMS UNSUPPORTED BY HARD EVIDENCE?  JUSTICE WILCOX SAYS "THE ONLY POSSIBLE JUSTIFICATION OF HAVING SPECIAL RESTRICTIVE RULES FOR THE BUILDING AND CONSTRUCTION INDUSTRY MUST BE THAT THIS IS NECESSARY TO PROVIDE INDUSTRIAL PEACE AND AN ACCEPTABLE LEVEL OF PRODUCTIVITY.  MANY PEOPLE ASSERT THAT THE INDUSTRY'S PRESENT HAPPY POSITION, IN THESE RESPECTS, IS ATTRIBUTABLE TO THE BCII ACT AND THE ACTIVITIES OF THE ABCC.  IS THERE ANY HARD EVIDENCE THAT SUPPORTS THAT ASSERTION?" (P 17)

We assert there is hard evidence as discussed above.

16. DO THE BCII OPERATIONS SUPPORT SAFER WORKSITES?  JUSTICE WILCOX SAYS, "MY FIRST REACTION TO THE ASCC STATISTICS IS THAT THEY DO NOT GIVE MUCH SUPPORT TO EITHER SIDE'S ARGUMENT CONCERNING THE EFFECT TO SAFETY OF THE WR AND BCII ACTS." (P19)

We agree with this position.  Our observations of the industry are that unions, construction firms, workers and managers all have a strong commitment to have safe worksites.  There are clear instances where poor behaviour has led to unsafe practices and injuries.  It is a constant battle for everyone in the industry to improve safety.  The operation of the BCII does not, of itself, directly contribute to safety one way or the other.  There is, however, an indirect contribution.

Construction unions have a long history of using safety as a mask for industrial action.  Instead of conducting a strike, they down tools alleging a safety breach.  The Cole Royal Commission identified this as a major concern.  The City Link project in Melbourne was plagued by such behaviour.  Safety is too important an issue to be abused.  Sham safety allegations risk creating a "boy who cried wolf" syndrome on worksites.  Genuine safety issues risk not being treated with the full seriousness they deserve.  The BCII activities specifically target "sham" safety allegations.  To the extent that this diminishes the "boy who cried wolf" syndrome, the BCII would contribute to safety.  But this cannot be observed within, or be detected by, the ASCC's statistics.

PART E:  A CHECKLIST OF QUESTIONS

The following questions are drawn directly from the Wilcox discussion paper.  Justice Wilcox has asked for response to these questions in this format.

CONTENT OF THE LAW ENFORCED BY THE SPECIALIST DIVISION

1. Is it desirable to maintain:

1. the special building and construction industry penalty for unprotected industrial action, as now provided by Chapter 5 of the BCII Act?

Yes.  Unlawful unprotected industrial action in the construction sector in the past has not been subject to penalties sufficient to deter the unlawful action.  If the enforcement Division is to have real teeth it must have available to it strong penalties.

2. the power of coercive interrogation, as in section 52 of the BCII Act?  In each case, please give reasons for your answer, with reference to evidence.

We understand the coercive interrogation powers are similar in nature to that available to ACCC and ASIC.  They are needed to break the "code of silence" that operated in the industry.  There are effectively whistleblower protection powers.

2. Should the Code and/or Guidelines be retained?  If so:

1. do they need amendment?  In what way?

The code should be maintained in their present form for a considerable period of time.  We would recommend review of the Code in the next two years.

2. should either document be put on a more formal basis, with provision for disallowance by Parliament and/or access to judicial review and the AAT?

No.  The Code is a guideline for use in the federal government's commercial tendering activities.  To give it a status beyond that would subject the Code to political manipulation or if legal appeal, would create significant inefficiencies in the Commonwealths commercial undertakings.

3. is it feasible to use the Guidelines to provide the control of the industry now sought to be obtained by the BCII Act?

Yes.  It is most appropriate and is perhaps the most powerful tool available to ensure a free and competitive market operates in the construction sector.




STRUCTURE, ACCOUNTABILITY AND INDEPENDENCE

3. Should the Specialist Division be subject to direction from the Director of the Inspectorate?  If so, to what extent?

The Specialist Division should be a stand alone institution in every respect.

4. Should there be a divisional supervisory board for the Specialist Division?  If so, how should it be constituted?  What should be its role?

The supervision should be similar to that applied to the ABCC, ACCC and ASIC.

5. Should inspectors within the Specialist Division work only within that division?

Yes.  The inspectors should be dedicated to the task of protecting competition in the construction sector.

6. What should be the role of the Specialist Division?

Identical to that of the ABCC.

7. What power should the Minister have to direct the manner of exercise of the Specialist Division's powers?

None.  The relationship between the Minister and the Specialist Division should be of a similar kind between the ACCC and ASIC and their respective Ministers.




SCOPE OF INVESTIGATION AND COMPLIANCE ACTIVITIES

8. Are the ABCC functions set out in section 10 of the BCII Act appropriate for the Specialist Division?  If not, what functions ought to be added or omitted?

Yes.

9. Should documents obtained pursuant to entry and inspection powers be admissible as evidence in other proceedings?

No comment.

10. In practice, should the Specialist Division concern itself with building employer breaches, such as non payment of employee entitlements;  or leave this to the Workplace Ombudsman?

No.  The specialist division is and should be concerned with protection of effective competitive market conditions in the sector.  Identified breaches of employee entitlements and related issues should be referred for resolution to the Workplace Ombudsman or like section in FWA.




SPECIALIST DIVISION POWERS AND AFFECTED PERSONS' RIGHTS

11. What should be the criteria for the issue of a summons to attend for compulsory interrogation, if this power is to be retained?

The powers should be similar to that available to the ACCC and ASIC.

12. What safeguards are necessary to guard against inappropriate use of the compulsory interrogation power?  Is prior concurrence desirable?  If so, by whom?

The safeguards should be similar to that available under interrogation from the ACCC and ASIC.

13. Should FWA reimburse summonsed people their expenses and lost wages?

Yes.




EXTERNAL MONITORING

14. Should the new legislation provide for external monitoring of the Specialist Division's exercise of its coercive powers?  If so, how and by whom?  Do you favour the OPI model?  If not, why not?

The OPI investigates serious criminal matters.  The Specialist Division will be involved in civil issues.  Oversight and monitoring should be similar to that applying to the ACCC and ASIC.




LITIGATION BY THE SPECIALIST DIVISION

15. Should the Specialist Division be able to bring legal actions in its own name to enforce workplace laws governing the building and construction industry?

Yes.

16. Should the Specialist Division be able to intervene in other parties' litigation?  If so, should this be as of right or only by leave of the court or relevant tribunal?

The Specialist Divisions should be able to intervene as of a right where it relates to matters to do with the construction sector.




USE OF INFORMATION AND OTHER AGENCIES

17. Should the Specialised Division be able to pass on information to other agencies?  If so, to whom and under what circumstances?

Yes.  The agency should work closely with other government agencies passing on information concerning breaches of law and cooperating with the agencies to rectify breaches of the law.  The specific agencies should include the Australian Taxation Office, Centrelink, state workers compensation and occupational and health and safety authorities.