Australian Competition Commission Investigating Construction

Increasing Focus on Building and Construction

In early 2017 the Australian Competition and Consumer Commission (ACCC) put the building and construction industry on its priority list, which identifies industries where the ACCC believes there are sufficient reasons for more intensive monitoring and investigation. As with any regulator the ACCC has limited resources, so this list indicates where those resources are being directed. In particular, unfair contract terms and misconduct were targeted as part of the key enforcement and compliance priorities for 2017.

The ACCC is an independent Commonwealth statutory authority responsible for enforcing consumer protection and fair trading laws and for promoting competition under the Competition and Consumer Act 2010. The ACCC investigates and prosecutes cartels and other types of anticompetitive conduct. Recent investigations by the ACCC into the industry include a 2015 inquiry into price fixing and cartel conduct in the Canberra construction industry and proceedings against the Construction, Forestry, Mining and Energy Union for secondary boycott conduct.

Whatever the ACCC has on the building and construction industry led to the establishment of a Commercial Construction Unit, a 14-member specialist unit to investigate alleged anti-competitive conduct in the commercial construction sector. In a press release ACCC chairman Rod Sims said the unit would allow the watchdog to focus on conduct of construction industry participants that might raise concerns under federal competition and consumer law: “The types of construction industry participants that could potentially be investigated by the unit include builders, subcontractors, unions and industry associations. The ACCC is aware that conduct in this sector has raised serious allegations of misconduct over a number of years. The unit enables a strategic focus to be given to work in this sector.

In a speech earlier this year, when the unit and its work was disclosed, Rod Sims said “We have some continuing investigations and we will put additional resources into some of those matters, and additional inquiries we have been scoping, to investigate fully some serious allegations of anti-competitive conduct.” Over 2017 the number of people in the unit has increased.

There are as yet no details of the work of the unit, led by Jane Lin, or any current investigations. However, the unit has been funded as part of the Government’s response to the 2015 Royal Commission into Trade Unions, whose report was covered in this post, which found serious issues of illegal conduct by both unions and contractors, and involvement of organized crime in the industry.

There has also been a Memorandum of Understanding signed between the ACCC and the Australian Building and Construction Commission (ABCC), another independent statutory authority, established after the royal commission by the Building and Construction Industry (Improving Productivity) Act 2016. The ABCC is primarily responsible for industrial relations and has successfully prosecuted a number of construction union officials.

The ACCC and the ABCC both have regulatory roles and responsibilities in relation to building and construction, and the work of the agencies is often complementary as they are both concerned with monitoring and reporting on the industry. The MOU identified issues where they intend to work together as:

(a) compliance with the CCA by building contractors and subcontractors covered by the Code for the Tendering and Performance of Building Work 2016 (Building Code)

(b) collusive tendering by building contractors and subcontractors covered by the Building Code

(c) other restrictive anticompetitive agreements between participants in the building and construction sectors

(d) unfair contract terms and security of payment compliance.

With the background of the Royal Commission report and the ongoing ABCC cases against the CFMEU and/or officials, the ACCC will also continue to pursue the union. Nevertheless, the Royal Commission produced plentiful evidence of illegal behaviour by contractors and developers, so the ACCC can be expected to pursue those lines of inquiry too.  

Sunlight is the Best Disinfectant

Collusion and Corruption in Canadian Construction

By coincidence, around the same time as Dyson Heydon was delivering his Royal Commission’s report to the Australian Government, in Canada another Commission had also found collusion and corrupt behaviour in the construction industry in Quebec. The problems of collusion and corruption are of course not unique to Australia and Quebec, as the Netherlands twelve years ago and Spain in 2014 demonstrate.

The findings from both inquiries on organised crime and a culture of lawlessness in the construction industry are disturbingly similar. Both Commissions identified various causes for the illegal activities they found to be pervasive in construction. How many recommendations get implemented by their respective Governments remains to be seen, although the Commissions’ findings and recommendations provide all the justification needed.

The Report of the Commission of Inquiry on the Awarding and Management of Public Contracts in the Construction Industry, headed by Justice France Charbonneau, was released in November 2015. The Report (4 volumes and 1,741 pages) made 60 recommendations to prevent collusion and corruption in the construction industry, and links with organized crime. Unfortunately, the report is in French so this post is drawn from English language coverage, not the original documents (including here for the recommendations, here for the main witnesses and their testimony, and here for context).

Following a 2009 Radio-Canada broadcast into corruption inside Quebec’s biggest construction union, a joint investigation was carried out by Canada’s Competition Bureau and Unité Permanente Anticorruption, an anti-corruption unit established by the Government of Quebec. The investigation uncovered evidence of a scheme giving preferential treatment to a group of contractors in municipal contracts, mainly for infrastructure projects.

As a result of that investigation, 77 criminal charges were laid against nine companies and 11 individuals in 2012. These charges included 20 counts of bid-rigging under the Act against nine companies and 24 counts of bid-rigging against six individuals. Other criminal charges included corruption in municipal affairs, breach of trust, improperly influencing municipal officials, fraud, production and use of counterfeit documents, secret commissions, misrepresentations or false statements, extortion and conspiracy.

The Charbonneau Commission was set up by the Government of Quebec in 2011 to look at cases of collusion and corruption in Montreal over 15 years between 1996 and 2011. The terms of reference included financing of political parties and organized crime in the construction industry, and recommendations for remedial measures to identify, eliminate and prevent collusion and corruption. Another 37 people, including two mayors, were arrested in 2012.

The commission shone a light on politicians’ and public officials’ relationship with construction and related service companies over more than two decades. It concluded that a link existed between political party financing and public contracts, calling the practice deep rooted and systemic. Several recommendations focused on reforms to political financing rules. Quebec’s strict laws governing political donations mean parties are unable to raise enough money for campaigns from individuals but are prohibited from receiving corporate donations. What happens instead is corporate donations funneled through proxies. This is illegal.

The scale of the system, however, extended much further. It linked construction firms, many with mafia ties, and a cabal of consulting engineers to politicians and managers in Montreal. Corrupt practices included kickbacks, illegal campaign contributions, rigged contracts with mafia payoffs, limiting competition for projects to a favoured few with the right political and/or mafia connections, and using threats to discourage competition by persuading potential bidders to withdraw. The Commission differentiated this kind of tacit collusion, where reputable firms withdraw from the market, from political corruption, where companies illegally contribute to political parties or candidates.

The Commission investigated the consulting engineering industry in Quebec and made a number of significant recommendations. Quebec is the only jurisdiction in Canada that does not allow a professional order to impose disciplinary sanctions on a partnership or a corporation that provides professional engineering services. This limits its supervisory powers to engineers as individuals.

Corrupt public authorities imposed unreasonably short deadlines for tenders, to benefit one bidder. Substantial and late alterations to a project, often described in addenda, without adjusting the tender filing deadlines, had the same effect. The case of Montreal's procurement of water meters was cited as an example of this.

Commissioner Charbonneau concluded corruption and collusion are "far more widespread than originally believed" and found that organized crime had indeed infiltrated the industry. The Italian Mafia was deeply involved in the industry and significant sections of the report were blacked out because of criminal cases before the courts.

Commissioner Charbonneau found several causes, connected with the public procurement of construction projects, for the various schemes uncovered during the inquiry. Major failings in procurement strategies, in particular the lack of expertise, resulted in public bodies being exposed to a high risk of collusive agreements. For example, the non-negotiable tariff contracts, called “rate-setting contracts”, set a price for manufacturing and laying asphalt a geographical area. The effect is that the contracts allow the asphalt plants owners to divide up territories.

There were also transparency issues. Examples were the release on request of the list of contractors who have the specifications or tendering documents, and the release of cost estimates for projects. The Commission noted that it was well-known the bid bonds Montréal requires for tenders are 10% of the estimated cost of the project. By disclosing the amount of the bond security required, the City was publishing the amount that it expected to pay.

A small group of union halls were allowed to dictate who is hired for each job, although around 70 percent of Canadian construction workers are not unionized. The testimony at Charbonneau was often salacious, with tales of the Province's largest union being infiltrated by the Mafia and Hells Angels, death threats for dissenters, million dollar investments of union funds in biker-owned strip clubs and massive financial fraud involving some labour leaders.

The Commission was asked to make recommendations, and the first recommendation was a Procurement Authority, a centre of expertise for procurement processes to support and oversee public bodies. In the words of the Commission: “The lack of personnel and the loss of expertise may have created fertile soil for collusion.” The Commission also recommended the various public authorities consolidate their internal expertise in construction.

The second recommendation was to vary the rule requiring contracts to be awarded to the lowest conforming bidder, arguing the strict rule of winning public contracts as lowest tenderer facilitated collusive agreements, based on the cartel's ability to control the results of calls for tenders.  Also the mandated 15 day tender period should allow adjustment for project complexity.

The Commission recognized long payment delays restrict competition in the industry, a factor in the creation and continuation of collusive agreements. Contractors bear the cost of payment delays and the lack of funds limits the numbers and growth of contractors. In 2013, more than three-quarters of contractors were said to have not responded to at least one call for tenders, because they viewed the payment clauses as abusive or they anticipated payment problems.

The other recommendations covered whistleblower protection, financial transparency, and relationships between officials, politicians, unions and contractors. There was some criticism that the recommendations were too moderate and lacked bite.

In its details the operation of this system was unique to Quebec and Montreal, due to cultural and institutional factors. However, the incentives inherent in the transactions between construction contractors and governments inevitably provide opportunities for side deals, collusion and corruption. And in Quebec these had become entrenched. Despite critics claims the Charbonneau Commission was too expensive and ineffective it did what any good anti-corruption inquiry should do, shine a light on the institutions and people involved. Sunlight is the best disinfectant.

Australian Construction Industry Inquiries

Three Royal Commissions in 25 Years

Following reports from the ABC and Fairfax media groups in 2012-13 on corrupt and illegal activity in several Australian trade unions, in particular the Construction Forestry Mining and Energy Union (CFMEU), the Health Services Union (HSU) and the Australian Workers Union (AWU), a Royal Commission was appointed in 2014 to inquire into trade union finances and activities. While the terms of reference covered a range of issues around union corruption, the CFMEU was the catalyst and provided justification for the inquiry. Over half the Commission’s hearings were on the CFMEU, the behaviour and associates of certain union officials, and payments or other deals made with employers in NSW, Victoria and Western Australia.

The Royal Commission into Trade Union Governance and Corruption was headed by a former High Court Justice, Dyson Heydon, and found evidence of blackmail, theft, intimidation and death threats, use of motorcycle gangs and other criminal groups as hired muscle, interference in union elections and illegal agreements with employers. The Final Report highlighted poor union record keeping, false invoicing and destruction of documents, union ‘rubber stamp’ committees which failed to enforce rules, payment of large sums by employers to unions for dubious ‘training’ schemes and ‘services’, and influence peddling in the Labor Party through inflation of union membership figures. The sums of money involved were also significant, with many officials benefiting from their positions through fraud or theft from the union (HSU in particular), or in the CFMEU through arrangements with employers for work on properties owned by officials.

Based on that evidence around 50 people, unions and companies were referred to various authorities for possible prosecution, including police and public prosecutors, the Australian Securities and Investments Commission (ASIC) and the Fair Work Commission. Some of the large private companies caught up in the inquiry were Thiess, John Holland, ACI, Downer EDI, Cbus, Winslow Constructors and Mirvac. Companies were found to have made payments to unions to get onto tender lists

The Final Report, released in December 2015, had 79 recommendations, over half concerned with the regulation of unions (24) and union officials (14). The first recommendation was “Commonwealth and State governments give consideration to adopting a national approach to the registration, deregistration and regulation of employee and employer organisations, with a single regulator overseeing all such organisations throughout Australia.” This Registered Organisations Commission would have investigative powers similar to ASIC, and focus on financial compliance with new rules on management and disclosure. Other recommendations were for significant changes to industrial relations laws, to restrict union privileges, and Federal competition laws on price-fixing and bid rigging.

Although the Royal Commission reported “widespread and deep-seated misconduct” across a number of unions throughout Australia, Commissioner Heydon said the Royal Commission had uncovered only “a small tip of an enormous iceberg”. There was also a confidential sixth volume because “a large volume of evidence cannot be publicly released due to serious threats made to certain witnesses and their families” and “reveals grave threats to the power and authority of the Australian state.”

Heydon’s most important recommendation was for the reestablishment of the Australian Building and Construction Commission (ABCC) as an independent industry regulator “For the purpose of seeking to combat the culture of disregard for the law within the Construction, Forestry, Mining and Energy Union”. Originally set up after the 2003 Cole Commission recommended widespread changes to the industry’s industrial relations laws, legislation establishing the ABCC as a statutory authority to monitor workplace relations was passed by the Howard Government in 2005. The ABCC was deeply opposed by the unions and in July 2012 was replaced by the Gillard government by the Fair Work Building and Construction Inspectorate, a body with much reduced scope and powers.

Before the Heydon Royal Commission there were two previous Royal Commissions into the building and construction industry, both headed by judges. Roger Gyles headed the Royal Commission into Productivity in the Building Industry in NSW (1991-1992) and Terence Cole the Royal Commission into the Building and Construction Industry for the Commonwealth Government (2001-03). At this time it is worth revisiting the findings and outcomes of those inquiries.

Both concluded the fundamental problem was a lack of respect for the rule of law, a phrase found repeatedly throughout both final reports, and this was a problem on both the employer and union sides. Cole said “Culturally, first, there needs to be recognition by all participants that the rule of law applies within the industry” and Gyles suggested those who break the law should be punished.

Gyles also said “Observance of the law and law enforcement in general play very little part in the industry. The law of the jungle prevails. The culture is pragmatic and unprincipled. The ethos is to catch and to kill your own … Once it becomes acceptable to break, bend, evade or ignore the law and ethical responsibilities, there is no shortage of ways and means to do so.”

Gyles found illegal activities “…range from physical violence and a threat of physical violence at one end to petty pilfering of building materials at the other. In between there is a great variety of illegal activities, essentially economic in nature or effect, from collusive arrangements involving giant corporations and industry associations to labour-only sub contractors paying small amounts of graft to project managers. Those involved range from managing directors of large corporations to labourers on site. No sector of the industry has been immune.”

Nevertheless, Commissioner Gyles concluded that industrial relations was overwhelmingly the most important issue and the union’s conduct and philosophy the fundamental cause of the industry's problems. He recommended the government deregister the BWIU (now the CFMEU) in both the State and Federal jurisdictions, and his Commission’s Building Industry Task Force pursue cases and recommend changes to the law. Gyles made 63 recommendations to the NSW Government, of which all but two were adopted.

Following Gyles came the NSW Code of Practice for the Construction Industry (1996), then the Commonwealth, State and Territory governments through the Australian Procurement and Construction Council (APCC) introduced a National Code of Practice for the Construction Industry (1997). Many codes and guidelines have been issued and revised at both levels of government over the last decade. Victoria, NSW and Queensland all have similar Codes of Conduct and Guidelines, and all three States have used, or made attempts to use, their role as major clients to enforce compliance with legal obligations. Policy interest in this area escalated significantly after 2003 when the Cole Royal Commission reported.

Ten years after Gyles the same problems were still prevalent. In his final report Commissioner Cole envisaged an industry where “… disputes are resolved in accordance with legislated or agreed dispute resolution mechanisms rather than by the application of industrial and commercial pressure. The rule of the law must replace industrial might.”

Cole found a disregard for enterprise bargaining, unlawful strikes and use of inappropriate payments. As a result 31 individuals were referred for possible prosecution, 392 instances of unlawful conduct were found (including 30 by employers), and 25 different types of unlawful conduct and 90 types of inappropriate conduct identified.

His view was “These findings demonstrate an industry which departs from the standards of commercial and industrial conduct exhibited in the rest of the Australian economy. They mark the industry as singular. They indicate an urgent need for structural and cultural reform. At the heart of the findings is lawlessness. It is exhibited in many ways.”

The final report had 212 recommendations, the great majority about changes to federal workplace relations legislation governing the building and construction industry and proposed an Australian Building and Construction Commission (ABCC) to monitor illegal behaviour by unions. While the ABCC clearly had a restraining influence on the industry in general and the CFMEU in particular it obviously did not fundamentally alter “standards of commercial and industrial conduct”.

It is worth asking if the recommendations of the Gyles and Cole Commissions, the other State efforts and the APCC codes, had all been implemented and followed through, would a third Royal Commission have been necessary? However, that would have been an expensive exercise, due to the cost of closely monitoring projects and adding resources for enforcement of existing laws to the relevant agencies. Also, The Heydon Royal Commission had a much wider remit than the building and construction industry, finding "It is clear that in many parts of the world constituted by Australian trade union officials, there is room for louts, thugs, bullies, thieves, perjurers, those who threaten violence, errant fiduciaries and organisers of boycotts."

While the recommendations from Gyles and Cole did become legislation, and Heydon’s may yet, perhaps the real underlying issue that should be addressed is why the building and construction industry operates the way it does. None of these Royal Commissions produced a vision of a different industry, apart from a law abiding one, and made no recommendations on the direction that strategic development of the industry might take.

Commissioner Gyles acknowledged the complexity of the industry: “the issues thrown up … have been manifold. Some have been controversial ... some are complex or technical ... In relation to some issues, I have fairly well developed and precise views as to what ought to happen. In relation to other issues, I … leave them to the government or interested parties to follow through, or make suggestions as to procedure by which they ought to be resolved.”

The three Commissioners agreed the problem is a culture of lawlessness, and the three inquiries found widespread illegal behaviour by both union officials and contractor managers. Their recommendations, in various ways, focused on increased regulation and enforcement through legislative action. In this they had “well developed and precise views”. However, while necessary, increased regulation does not address the issue of why the building and construction industry has such a culture. What are the causal factors at work in creating this culture? How might they be affected by industry practices and institutions in areas like recruitment and training, tendering and procurement, wage setting and tripartite agreements between unions, employers and government?

Construction has a reputation for corruption and collusion, and is ranked by Transparency International as the world’s most corrupt industry, mainly due to issues in developing countries. But this is also a problem across countries in the OECD, not just for Australia, because many countries have found entrenched anti-competitive practices and criminal involvement in the industry. For example, the recent Charbonneau Commission in Canada into awarding of public contracts in Montreal concluded corruption and collusion are "far more widespread than originally believed" and organised crime had “infiltrated” the industry.

Industry policy and industrial strategies are very much out of fashion in Australia and elsewhere these days. In their absence we get quasi-judicial agencies and an emphasis on law enforcement and industrial relations. It is unlikely these agencies will ever get the resources needed to cover an industry as large and diverse as building and construction, thus it is unlikely that the issues of criminality and illegal behaviour can be solved by increased regulation alone.