The HomeBuilder Program and Australian Housing

 State and federal governments criticised in COVID inquiry report 

 

The release of the COVID 19 Response Inquiry Report on October 28^th included a section on the HomeBuilder program. This was the third report on HomeBuilder, following a KPMG report on the National Partnership Agreement in 2022 and an AHURI report on Responding to the Pandemic in 2020. There was also a review by PWC for Treasury in 2020. 

 

A book published in 1979 called The Construction Industry: Balance Wheel of the Economy argued counter-cyclical economic policy increased construction during recessions, through expenditure on public projects and the effect on residential building of lower interest rates. This has often been the case, in Australia the Rudd Government increased public expenditure on construction after the 2008 financial crisis and the Reserve Bank lowered interest rates to boost residential work after the mining boom ended in 2014. 

 

From this perspective, HomeBuilder was a conventional policy, introduced to counter the recessionary effects of the COVID-19 pandemic. In 2020 economic activity was decreasing and there were estimates of potential GDP losses of up to 20%. In a 2022 speech the Treasury Secretary Steven Kennedy said: ‘The pandemic was unlike any other downturn in recent history and precipitated the most severe economic downturn since the Great Depression. It was a health crisis before it became an economic crisis. Public health restrictions and cautious behaviour by people who didn’t want to catch the virus severely disrupted daily life and led to a sharp decline in output.’ 

 

Total Australian Government spending on economic support measures was $314 billion, or 15.2% of GDP. In that context, HomeBuilder was a minor program compared to the tens of billions spent on JobKeeper and other transfer payments. However, those were programs administered by the Australian Tax office for a large proportion of the population, whereas HomeBuilder was a targeted program administered by the states and territories with strict eligibility requirements. 

 

This post first outlines the program, followed by the relevant section of the Inquiry report, and the review of the National Partnership Agreement. It assesses the effectiveness and consequences of HomeBuilder. How accurate were the forecasts of expenditure on the program? What were the goals of the program and were they achieved? What were the outcomes? Is it an example of good policy, or of poor policy-making that did not consider industry characteristics and capacity? 

 

Outline of the HomeBuilder Program 

 

The program was introduced in mid-2020 to support residential construction by providing a grant of $25,000. Applicants had to have signed contracts between 4 June 2020 and 31 December 2020 to purchase a house and land package, build a new home, do a substantial rebuild or renovation of an owner-occupied property, or purchase an off-plan apartment or townhouse. Construction had to have commenced within three months of the contract date. On 29 November the program was extended to 31 March 2021, with the grant reduced to $15,000 and the commencement time increased to six months. In April 2021 the construction commencement time was increased to 18 months. 

 

There was an eligibility income cap of $125,000 for an individual or $200,000 for a couple, based on 2018-19 or later taxable income (the lack of clarity here became a source of confusion and an issue for the states and territories). There was also a cap on the value of new builds that differed between states, and on the value of renovations. However, the grant amount was the same everywhere for everyone, and the program itself was uncapped. 

 

The government underestimated take-up of the program. It was forecast to support 27,132 applications totalling $680 million, with the extension expected to add 15,000 applications at an estimated cost of $241 million. However, by June 2024 113,156 applications had been approved and $2.6 billion had been paid. Although applications closed in April 2021, there may be further costs as applicants have until 30 June 2025 to submit documents supporting their applications.

 

HomeBuilder was implemented through a National Partnership Agreement with the state and territory governments, which made the states responsible for administering the program. It was designed to complement existing state and territory First Home Owner Grants Programs, then all states except South Australia gave stamp duty concessions for new builds (whose value varied greatly but might be up to $40,000 depending on the house and location), and Western Australia, Tasmania and the Northern Territory added an extra ‘home building boost’. Combining HomeBuilder with the state and territory schemes, first home buyers in Western Australia and the Northern Territory could access $55,000 in grants, in Queensland, Victoria and Tasmania up to $45,000 in grants, and in NSW $35,000. The federal and state programs are in Table 1.

 

 

Source: AHURI 2020: 15. Responding to the Pandemic. The table does not include the value of stamp duty exemptions.

 

 

The COVID Inquiry Report

 

The report included a couple of interesting data points on construction during COVID. It noted industries with a large proportion of small businesses received most of the JobKeeper and Cash Flow Boost payments, including construction, which received $2.5 billion. These payments were made to employers. There was also a graph of changes to revenue for firms between 2019 and 2020 (p. 582), which showed 45% of construction firms increased their revenue, 30% had decreased revenue by up to 50%, and there were 15% of firms with revenue decreasing by more than 50%. 

 

The report focused on the inflationary effects of HomeBuilder. Between September 2021 and September 2022 the contribution of housing to quarterly inflation was between 20% and 40% of the total change in the consumer price index (CPI). The fiscal stimulus from government grants combined with existing labour shortages, exacerbated by border closures, and pandemic related supply chain disruptions that increased material costs. As a result, the cost of building a house increased by around 30% during COVID. 

 

Table 2. Construction contribution to quarterly inflation (% change)

                                    Sep 21  Dec 21  Mar 22  Jun 22   Sep 22

Construction                  0.35        0.37        0.56        0.52        0.67

Total CPI                       0.8           1.3           2.1         1.8         1.8

Source: COVID 19 Response Inquiry Report 2024: 59. From ABS data. 

 

The inquiry report found the program inappropriate and inflationary: ‘the HomeBuilder program created excess demand in an industry facing supply constraints. This has been a significant contributor to inflation coming out of the pandemic, and the program’s focus on renovations rather than new builds added to the general housing shortages. These types of demand-side stimulus measures are largely not appropriate in pandemics where industries are facing supply constraints’ (p. 549). 

 

A counter-cyclical increase of government expenditure in a recession is a common use of fiscal policy, and the construction industry is often targeted because it is both an employer of many workers and a major source of demand for domestic suppliers. The inquiry report concluded: ‘There are clear indications that the infrastructure measures taken – in particular, HomeBuilder – overheated the industry and contributed to inflation in the post-pandemic era. The program was designed explicitly to stimulate aggregate demand and support the residential construction sector. It acted to stimulate consumption expenditure and lowered the significant household savings built up during the pandemic. However, the measure failed to appropriately take into account the supply-side effects of the pandemic’ (p. 593) 

 

The section of the Inquiry report on HomeBuilder is unsatisfactory because, apart from the 113,156 applications received and the table on CPI, there is no other data. A review of the program that does not include houses commenced and completed, or people employed, is not comprehensive and does not allow conclusions to be drawn on the effectiveness of the program. That data is provided below when assessing the program. 

 

In an immediate response to the report ‘Master Builders Australia CEO Denita Wawn said HomeBuilder was the right policy for the time and should not become the scapegoat for systemic housing challenges.’ At the time of writing no other industry association has publicly commented on the report. 

 

Infrastructure Spending

 

As well as HomeBuilder, Australian governments significantly increased spending on infrastructure during COVID. The Inquiry report found by May 2021 the Commonwealth Government had committed $14 billion to infrastructure projects, and the 2021–22 Budget included an additional $15.2 billion over 10 years for road, rail and community infrastructure. Also in 2021, the New South Wales Government committed to $100 billion in infrastructure work, and the Queensland Government announced projects worth $52 billion. In both cases the projects were expected to be completed over four years. 

 

Figure 1. Engineering construction

Source: ABS 8762. Work commenced by the private sector. 

 

As Figure 1 shows, the public infrastructure projects announced in 2021 were commencing in 2022, and in the five quarters from March 2022 to March 2023 over $57 billion of public engineering work commenced. This was an unprecedented amount, for comparison, in the 2020-21 financial year public engineering work commenced was $21 billion. In 2021 private engineering commencements also began increasing, and both public and private commencements then peaked at the same time in December 2022.

 

 

HomeBuilder National Partnership Agreement Review: Stakeholder Consultation Report

 

The 2022 review of the National Partnership Agreement (NPA) by KPMG found state and territory governments were not consulted on the design or implementation of the HomeBuilder program. The first they knew about the program was when it was publicly announced. This is somewhat ironic, given first the objective of the NPA was to create ‘a framework for the parties to work cooperatively, to provide financial assistance to eligible owner-occupiers to increase residential building and maintain jobs. No administrative funding was provided by the Commonwealth Government for establishing, running and reporting on HomeBuilder, despite the size of the program. 

 

The states and territories were responsible for administering the program, checking eligibility, and compliance and auditing. The review found ‘This created significant implementation challenges for these jurisdictions.’ There were also significant costs associated with assessing eligibility and the principal place of residence of applicants. The report also found insufficient clarity and guidance on the income caps, in the definition of substantial renovation, on citizenship requirements, and for cases where replacement contracts were required. Treasury ‘erroneously assumed’ existing First Home Owner Grant portals could be used. 

 

The review commented on the inflationary effect: ‘It could be said that the HomeBuilder did partially contribute to the constraints in supply of labour, materials and land that resulted from this industry overheating. However, it is critical to note that this would have been just one factor. Broader supply chain issues because of the COVID-19 pandemic were another, and much more impactful, factor.’ (p. 15).

 

Issues raised in the consultations with the states and territories were:

·       Did the eligibility criteria favour middle to high income earners?

·       Was offering the same amount for new build and renovations a fair approach?

·       Did the NPA consider state and territory ‘operating environments and industry contexts’ such as internal migration and their supply and demand balance?

·       Did HomeBuilder only benefit a small number of builders?

 

 

What Were the Outcomes of the Program?

 

The purpose of HomeBuilder was to increase residential building and maintain jobs by providing financial assistance to eligible owner-occupiers. Both of those objectives were achieved. The total number of people employed in construction in August 2020 was 1,145,814, a year later in August 2021 it had fallen to 1,114,644, but by August 2022 it was 1,251,601. Construction employment continued increasing through 2023 and 2024, reaching a record high of 1,358,239 in May 2024. 

 

As Figure 2 shows, residential commencements increased rapidly after the program started in mid-2020. The 42,475 houses commenced in the June quarter 2021 was an all-time record, well above the quarterly commencements of around 30,000 during the housing boom between 2015 and 2018. The increase for apartments was not as dramatic, although still substantial, rising from 15,070 in the September quarter 2020 to 22,913 in the June quarter 2021. 

 

Figure 2. Number of dwellings commenced

Source: ABS 8752

 

The combination of HomeBuilder induced demand with COVID supply chain disruptions had three effects on residential construction. First was the increase in completion times for houses. As Figure 3 shows, the industry usually delivers between 25,000 and 30,000 houses a quarter, less in the March quarter because of the January holiday, with most houses completed within 12 months. It took three years, until the December quarter 2023, to complete the extra 100,000 houses commenced in 2020 and 2021 during HomeBuilder [1]. There was less effect on apartment completions because the number of commencements was well below past record levels, so the volume of work was within industry capacity not above it. 

 

Figure 3. Number of dwellings commenced and completed

Source: ABS 8752

 

Second was the increase in the cost of inputs. Some of the materials and component price increases were due to global factors, but there were also significant increases in domestic prices and labour costs. As Figure 4 shows, the ABS input price index increased from 120 in December 2020 to 154 in December 2022.

 

Figure 4. Housing costs 

Source: ABS 6427

 

In the 12 months after the surge in commencements due to HomeBuilder, between the December quarter 2021 and December 2022, the price of basic inputs such as timber, plywood, glass, cement and steel all increased by around 15%. Some of the increase was due to higher energy and freight costs, and the other materials category was affected by plaster products because of a global price increase for gypsum. However, the main driver of these price increases was the high level of demand created by HomeBuilder and also, for concrete and steel, infrastructure projects. 

 

Figure 5. Construction input price changes to December quarter 2022

Source: ABS 6427

 

The increase in house building costs differed across the states. In the Reserve Bank’s November 2024 Statement on Monetary Policy the RBA commented: ‘Labour costs continue to contribute to ongoing cost growth, partly driven by the large pipeline of construction work and ongoing labour shortages for certain trades. Outcomes have varied across capital cities. Year-ended new dwelling cost inflation has returned to around its pre-pandemic average in Sydney, Brisbane and Hobart. By contrast, new dwelling cost inflation in Perth has increased further in year-ended terms, consistent with high demand for new homes and increases in labour costs’. The accompanying graph highlights how rapid and extreme the pandemic cost increases were.

 

Figure 6. Capital city cost inflation

Source: Reserve Bank of Australia, Statement on Monetary Policy, November 2024. 

 

 

Third was the increase in insolvencies between 2022 and 2024, as many builders on fixed price contracts entered into during HomeBuilder were unable to continue after cost inflation led to losses on those projects. Because of measures put in place to support industry during the COVID pandemic there were fewer insolvencies than usual in 2021-22, with a total of 1,639 construction businesses going into administration. The numbers for 2023 and 2024 show a substantial increase in total insolvencies from 2,812 to 3,882.

 

Figure 7. Construction insolvencies

Source: Australian Securities and Investment Commission

 

 Conclusion

 

A counter-cyclical increase in government construction expenditure is a common use of fiscal policy. However, the COVID Inquiry report concluded: ‘There are clear indications that the infrastructure measures taken – in particular, HomeBuilder – overheated the industry and contributed to inflation in the post-pandemic era.’

 

The purpose of HomeBuilder was to increase residential building and maintain employment, and it succeeded in both of those. There was a small decrease in total construction employment in 2021 of around 30,000, followed by a steady increase to a record 1,358,239 people in 2024. The program quickly increased housing commencements to record levels, but completion times increased and it took three years to complete the extra 100,000 houses commenced in 2020 and 2021.

 

The size of the program was uncapped and Treasury significantly underestimated the number of applications [2]. Their forecast for the cost of the program was $680 million, and the extension $241 million but, instead of $921 million, by June 2024 $2.6 billion had been paid. Although HomeBuilder was a minor program compared to the tens of billions spent on transfers through the Australian Tax office, it was targeted at a specific industry and administered by the states and territories. 

 

Over time the effects of the sudden increase in commencements financed by HomeBuilder became less positive. The COVID Inquiry report focused on the inflationary effect of the rapid increase in demand on the cost of housing, which accounted for up to 50% of CPI increases in 2021-22. The report concluded the demand side stimulus was not appropriate and ignored the supply side effects. The increase in residential commencements was not only due to HomeBuilder, which combined with first home owner grants, stamp duty exemptions, and other incentives given by state governments, all of which added to the excessive level of demand. 

 

Likewise, the increase in materials and component prices was not only due to HomeBuilder. Both the Commonwealth and the states also increased expenditure on infrastructure during COVID, which added to the inflationary effects. In the five quarters from March 2022 to March 2023 over $57 billion of public engineering work commenced, a record amount, and both public and private engineering construction commencements peaked at the same time in December 2022. 

 

There was a notable failure in policy making in 2020, governments and their advisors should have decided to target either residential building or engineering construction for stimulus. To simultaneously do both showed a poor understanding of construction industry characteristics and capacity, and ignored the obvious domestic and international supply side constraints during the pandemic. Also, governments would have been aware of rising private sector engineering expenditure when increasing their own spending. There is no evidence of industry being consulted or asked for advice at any point while these decisions were being made. 

 

The consequences of these poor policy decisions by state and federal governments have now become apparent. Over 8,000 construction businesses have become insolvent since 2021, many because of losses on fixed price contracts entered into under HomeBuilder, affecting thousands more customers, subcontractors and suppliers. The cost of inputs to housing construction have increased by around 30% since 2020, increasing house prices and making new houses unaffordable for many first home buyers. Further, the build cost of new apartments is now above the price of existing stock, so the apartment market is broken. Infrastructure projects have had cost increases and delivery delayed. 

 

There is a long tradition of increasing government expenditure on construction to counter economic downturns, however HomeBuilder was not good policy. Rather, when combined with the increase in public infrastructure spending, it is an example of reactive over-reach and poorly considered policy-making. Over the last two years inflation, and therefore interest rates, would have been substantially lower without HomeBuilder, as would house prices. That may be hindsight, and with COVID the circumstances were extreme. Nevertheless, the program did not take into account the characteristics and capacity of the construction industry, and at no point attempted to address the important supply side issues the industry had to deal with. Unfortunately, the implementation and size of the program demonstrated little understanding of the industry by governments and their advisors.

 

                                                                      *

 

[1] In the Australian Financial Review (1.11.2024)  the Stockland CEO Tarun Gupta was quoted: ‘pre-COVID it took his company 16 weeks to build a home, it doubled to 32 weeks in the pandemic, and is back to 20 to 22 weeks. He dubs it a new “resistance level”. Likewise, he says civil works for a 300- or 500-lot precinct used to take 26 weeks, blew out to 42 weeks in Victoria (the worst state at the time) and is back to 32 to 34 weeks.’

 

[2] None of the reviews of HomeBuilder looked at the Treasury forecasts or asked why they were so far off the mark. 

The CFMEU, Allegations of Illegal Activity, and Three Royal Commissions

Will this time be different?

 

For many people in the Australian construction industry the allegations of illegal activity, criminal links and general thuggery against union organiser John Setka and the Construction Forestry Mining and Energy Union (CFMEU) will not have come as a surprise. Although it has been widely known for many years that there was a problem, the investigation by the Nine newspapers and 60 Minutes has publicly revealed the extent of the problem and gathered the evidence needed to take action against the union. 

 

The Albanese Government is going to place the CFMEU under external administration, which avoids the problem with deregistration where the union continues to operate with the existing leadership but outside the industrial relations system. That was what happened in 1986 when the Hawke Government deregistered the militant Builders Labourers Federation (BLF) after evidence of criminal and corrupt activity became public. BLF secretary Norm Gallagher was found guilty of receiving secret commissions and building materials from building contractors and sentenced to 18 months jail in 1986. Many BLF members then joined the Building Workers Industrial Union (BWIU) which in 1992 became the CFMEU, and BLF organiser John Setka became Victorian state secretary. 

 

We have been here before. Following media reports in 2012-13 on corrupt and illegal activity in the CFMEU and other trade unions, a Royal Commission headed by Dyson Heydon was appointed in 2014. Over half the Commission’s hearings were on the CFMEU, the behaviour and associates of union officials, and payments or other deals made with employers in NSW, Victoria and Western Australia. The Royal Commission reported ‘widespread and deep-seated misconduct’ across a number of unions throughout Australia, however Commissioner Heydon said the inquiry had uncovered only ‘a small tip of an enormous iceberg.’ 

 

Before the Heydon Royal Commission there had been two previous Royal Commissions into the building and construction industry, both also 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). Both concluded the fundamental problem was a lack of respect for the rule of law, a phrase found repeatedly throughout their 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. 

At this time it is worth revisiting the findings and outcomes of the three Royal Commissions, which is what this post does, starting with the most recent Heydon Royal Commission, which a decade ago found evidence of the CFMEU’s close relationship with motorcycle gangs and criminal groups.

 

The Heydon Royal Commission 2014-15

 

Following reports from the ABC and Fairfax media group (now Nine Entertainment) in 2012-13 on corrupt and illegal activity in several Australian trade unions, in particular the 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 former High Court Justice Dyson Heydon, who 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. In his view ‘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.’ 

 

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, with 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, 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.’

 

An 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 opposed by the CFMEU and the ACTU, and in July 2012 the Gillard Government replaced it with the Fair Work Building and Construction Inspectorate, a body with reduced scope and powers. In 2016 the ABCC was reestablished by the Turnbull Government, then in 2022 the Albanese Government transferred its responsibilities to the Fair Work Ombudsman and in 2023 abolished the ABCC for a second time. According to the Australian Financial Review  the Fair Work Ombudsman was ‘handling 35 court cases against the CFMEU, including six appeals,’ after the ABCC transferred 40 remaining matters to the agency in 2023. 

 

The cases brought against the CFMEU by the ABCC were mostly about illegal pickets, intimidation and abuse, and coercing companies to accept union agreements, all industrial relations issues. These cases typically resulted in over $16 million in fines between 2016 and 2022 that were easily paid by the CFMEU, which in 2024 had net assets of $106 million.  Over both periods of the ABCC’s existence there were no cases involving association with people with criminal records, and there were no reports of any advice to the ABCC from the state and federal police forces responsible for monitoring the activity of bikie gangs. 

 

Before the Heydon Royal Commission there had been 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 and Terence Cole the Royal Commission into the Building and Construction Industry for the Commonwealth Government.

 

 

The Gyles Royal Commission 1990-92

 

In the 1980s, industrial warfare made construction sites a battleground because of the intense rivalry between the Builders' Labourers Federation (BLF) and the Building Workers Industrial Union (BWIU, now the CFMEU). In July 1990 the New South Wales Premier Nick Greiner appointed Roger Gyles QC to head the Royal Commission into Productivity in the Building Industry in NSW (RCBI), after spectacular cost overruns from union disputes on major projects associated with the bicentennial in 1988, such as the Convention Centre at Darling Harbour and the Dowling Street Courts, among others. The deadline for the Royal Commission was extended three times after September 1991, before the Final Report was released in May 1992. An enormous amount of material was compiled by the RCBI, the Final Report’s 62 recommendations are in Volume 7 of a 10 volume report that is over 5,000 pages long.  

 

The RCBI had a substantial staff. A Building Industry Task Force to investigate breaches of the law and commence legal proceedings was headed by a Crown Prosecutor and staffed by lawyers, law enforcement officers and expert advisers from the industry. Thirty policy and research analysts were responsible for producing the discussion papers the RCBI issued. There were three volumes of appendices with data and analysis in the Final report, with detailed case studies of 20 major projects, industry surveys of contractors, subcontractors and suppliers, and background papers on a range of topics including insolvency, partnering between contractors and clients, and industry characteristics. 

 

A Second Commissioner, Kevin Holland QC, was appointed to conduct hearings on tendering practices which revealed bid rigging, payment to industry organisations of special fees by successful tenderers, and unsuccessful tender fees paid to the other tenderers providing cover bids. This collusive behaviour by contractors acting as cartel was (as is) illegal and was facilitated by their industry associations. Holland’s inquiry resulted in repayment by contractors to the NSW Government of some of the inflated costs of public projects. The major contractors representative association, the Australian Federation of Construction Contractors was closed down (to be later reborn as the Australian Contractors Association) and Gyles recommended to the government that advice be sought on whether the Master Builders' Association of New South Wales should be deregistered as an industrial organisation.

 

Hearings before Gyles on the behaviour of unions and some union officials revealed practices beyond the rights of unions on behalf of their members. 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 subcontractors 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.’

 

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 did acknowledge 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.’

 

Nevertheless, Gyles concluded industrial relations were overwhelmingly the most important issue, and the union’s conduct and philosophy the fundamental cause of the industry's problems. He recommended deregistration of the BWIU in both the State and Federal jurisdictions, and that the Commission’s Building Industry Task Force pursue cases and recommend changes to the law. The Final Report found:

 

the conduct of the members and officials of the former BWIU (NSW branch) very severely affect productivity and efficiency of the industry in this State, both because of the persistent disruption of projects and businesses and because of the restrictive work practices instituted and defended whilst work is actually proceeding (p.5).

 

In all, Gyles made 62 recommendations to the NSW Government, of which all but two were adopted. The Commission’s report recognised the structure of government departments and authorities makes implementation of many of its recommendations difficult. Gyles recommended the government should take the lead in a client-led process of reform, and a NSW Ministry of Construction should be set up, with the role of developing a code of conduct and procedure appropriate for each form of project delivery. In 1991, the NSW Legislative Council's Standing Committee on State Development had also recommended that a Ministry of Construction be established to plan capital works, help departments to improve their capital works management skills, check projects in order to improve cost effectiveness and issue guidelines for all public sector capital works projects. 

To implement the RCBI’s recommendations a Construction Policy Steering Committee (CPSC) was established with people from the Department of Public Works, the Roads and Traffic Authority and other NSW agencies, but no private sector involvement. Its primary responsibility was to develop a code of practice to be implemented by all government agencies which would then drive reform within the industry. The CPSC's work was published in 1996 as the Capital Project Procurement Manual (CPPM), with the Code of Practice for the Construction Industry and a Code of Tendering for the Construction Industry. The objectives of the CPPM were to define minimum levels of acceptable behaviour, and to provide goals that facilitated higher performance from both individuals and organisations. 

The NSW strategy was mirrored in Victoria and Western Australia. Both States adopted Codes of Practice requiring contractors and subcontractors to meet defined standards on industrial relations and tendering. Then the Commonwealth, State and Territory governments through the Australian Procurement and Construction Council introduced a National Code of Practice for the Construction Industry (1997). 

 

The Cole Royal Commission 2001-03

 

In May 2001 the CFMEU’s NSW Secretary John Sutton made allegations of organised criminal activity within the union on the ABC’s 4Corners program. As in the 1980s, there was intense conflict between ex-BWIU members and the Victorian BLF for control of the NSW branch. A report for the Minister for Workplace Relations Tony Abbott then alleged union officials were engaged in bribery and criminal corrupt conduct, and accepted secret commissions. The Howard Government appointed Justice Terrence Cole QC as sole Commissioner in August 2001 to inquire into the ‘nature, extent and effect of any unlawful or otherwise inappropriate industrial or workplace practice or conduct.’ 

 

Ten years after Gyles the same problems were still prevalent. Commissioner 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. 

 

In his Final Report 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.’ 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 in 2003 had 212 recommendations, the great majority about changes to federal workplace relations legislation governing the building and construction industry. Federal Cabinet extended the operation of the Commission’s Building Industry Task Force, pending the establishment of the Australian Building and Construction Commission (ABCC). However, the legislation for that was rejected by the Senate and it was not until 2005, after the election in 2004 when the Coalition gained control of the Senate, that the bill was passed. Cole intended the ABCC to monitor illegal behaviour by unions and, while the ABCC had a restraining influence on the conduct of the CFMEU, it clearly did not fundamentally alter industry ‘standards of commercial and industrial conduct’ before its first abolition in 2012.

 

Conclusion

 

Nearly 40 years after the deregistration of the BLF because of corrupt officials and illegal behaviour, evidence of these problems today in the Construction Division of its successor union the CFMEU have again been made public by investigative journalists. Previous media reports on these issues led to two Commonwealth Government Royal Commissions in 2001 and 2014, and there was a third Royal Commission in NSW in 1991. Through these three Royal Commissions and other state inquiries, the ABCC coming and going twice, and the shift of industrial relations from a centralised system to enterprise bargaining, the CFMEU has endured. 

 

While many of the recommendations from Commissioners Gyles, Cole and Heydon did become legislation, perhaps the 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 industry policy or the direction that development of the industry might take. In their absence we have had quasi-judicial agencies and an emphasis on industrial relations. 

 

The three Commissioners agreed the fundamental problem is a union culture of lawlessness, and the three inquiries found illegal behaviour by both union officials and contractors. In keeping with Australia’s complex and institutionalised industrial relations system, the focus of their inquiries was on industrial or workplace practice and conduct and their recommendations, in various ways, primarily focused on increased regulation and enforcement through legislative action. In this they had, as Roger Gyles’ said, ‘well developed and precise views.’ 

 

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 agreements between unions, employers and government? Clients use of fixed price contracts makes contractors vulnerable to union action that may delay their projects, and can also affect their choice of subcontractors. 

 

It is worth asking if the recommendations of the Gyles and Cole Commissions, and other subsequent State inquiries and industry codes of conduct, had all been implemented and followed through, would the third Heydon Royal Commission have been necessary? Enforcement is an expensive exercise, due to the cost of monitoring projects and the staffing and resources required for the relevant agencies. It fact, it is unlikely these agencies would get the resources needed to cover an industry as large and diverse as construction, thus it is unlikely that the issues of criminality and illegal behaviour can be solved by increased regulation alone. Also, there have no police actions against the CFMEU for links to criminals over the last three decades despite the evidence available, and the cases taken to court by the ABCC when it was active were on workplace issues and behaviour.  

 

Will this time be different? Under the centralised industrial relations system of the 1980s, deregistration was the only option for dealing with the BLF. Today an external administrator can be appointed to run the CFMEU and reform the union and replace the leadership. While that is a necessary step to stop corrupt and illegal behaviour by current officials, it may not be sufficient to replace the ‘law of the jungle’ with  the ‘rule of law’ in the Australian construction industry. 

 

 

 

 

 

 

Australian Construction Productivity in the 1990s

Construction Industry Productivity in Australia

In 1992 and 2003 I contributed to the research published on construction industry productivity by two government inquiries. The first was the Royal Commission into Productivity in the Building Industry in NSW (1991-1992), and the second was the Royal Commission into the Building and Construction Industry for the Commonwealth Government (2001-03). These posts have the relevant parts of those publications, which are reviews of the then current data and research.

The first post is from a paper that covered the 1980s was originally published as Productivity and the Australian Construction Industry by the Royal Commission into Productivity in the Building Industry in NSW. 

This second post covers the 1990s and was an Appendix in a Discussion Paper from the Royal Commission into the Building and Construction Industry for the Commonwealth Government.

A third paper in this series is a conference paper of mine from 1999 called Recalculation of Australian Construction Productivity which looked at changes in output per person in the special trades. The document can be downloaded from a Dropbox file here.

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A3.1     Measures of productivity

Productivity refers to the relationship between the quantity of goods and services produced and the quantity of resources employed in producing those goods and services.  The economic definition of productivity is the ratio of output over input, and in very general terms can be described as the efficiency of production.  This definition focuses on the quantification of inputs and output.

Box A3.1           Measures of productivity

Within the economic definition there are three productivity measures used. 

The commonest measure is labour productivity, which refers to the output-to-labour ratio.  This is typically measured as output per person employed or per hour worked.  Labour productivity can rise through improvements or changes in the production process, technical knowledge, managerial expertise, greater use of equipment or machinery, and so on. 

Capital productivity is measured as output per unit of capital.  There are significant problems involved in determining the amount of physical capital (plant and equipment, buildings and structures) in use at any point in time because investment is creating new assets and wear and tear is depreciating existing assets.

The wider concept that combines labour and capital productivity measures is total factor productivity (TFP) or multi-factor productivity (MFP).  This combines the labour and capital inputs used in the production process by an industry and measures their respective contributions to output. 

Australian Data

In Australia, the ABS provides indexes of output per hour worked and per person employed by industry for the market sector.  The average increase in labour productivity in the market sector of the Australian economy between 1991-92 and 1999-2000 was 2% a year.  Over the same period labour productivity in the construction industry increased by 1% a year, with wide variation in the year-on-year rate.  As can be seen over the longer period 1986 to 2000 the construction industry managed to lift productivity by only 3%. These indexes are very sensitive to differences in the rate of change between output (measured as industry gross value added) and input (hours worked).  This difference explains the drop in construction labour productivity in 2000-2001, where the growth in hours worked was greater than growth in output.  The public sector (administration, defence and education) and property and business services have no estimates of output independent of inputs and productivity therefore cannot be estimated for these industries.  The rest of the economy is known as the market sector.

Table A3.1       Labour productivity:  indexes of gross product per hour worked, by industry

	1986	2000	2001
Agriculture, forestry and fishing	66.9	100.0	99.7
Mining	44.2	100.0	107.6
Manufacturing	64.6	100.0	101.3
Electricity, gas and water supply	35.9	100.0	98.0
Construction	96.6	100.0	85.4
Wholesale trade	71.7	100.0	104.2
Retail trade	87.6	100.0	100.9
Accommodation, cafes and restaurants	109.1	100.0	93.8
Transport and storage	74.0	100.0	97.1
Communication services	34.0	100.0	104.8
Finance and insurance	57.0	100.0	102.0
Property and business services	0.0	0.0	0.0
Government administration and defence	0.0	0.0	0.0
Education	0.0	0.0	0.0
Health and community services	83.3	100.0	96.5
Cultural and recreational services	109.7	100.0	110.6
Personal and other services	0.0	0.0	0.0
All industries	80.2	100.0	100.1

Source: Australian System of National Accounts, ABS, 2000-01, Cat No. 5204.0

While the ABS does not produce industry level productivity indexes, the Productivity Commission has produced estimates using ABS data on output, hours worked and capital input by industry.  In a Productivity Commission research report on employment and productivity, Barnes et al. (1999) found that MFP growth for construction between 1978-79 and 1995-96 was negative, at -0.2% a year, compared to market sector MFP growth of 1.2% a year.  The Productivity Commission released revised MFP estimates for the market sector of the economy in December 1999.  The new release made significant revisions to estimates for earlier years, due to a new ABS methodology for estimating productivity based on an improved and more complex methodology for deriving capital inputs.  For the construction industry the revision lifted productivity growth from negative to positive, at 0.3% a year.  This was still well below the level of the market sector as a whole, at 1.0% a year growth.

Table A3.2       Growth in multifactor productivity by industry sector, percent per year

Industry	1985-86 to 1998-99
Agriculture	2.7
Mining	1.5
Manufacturing	1.3
Electricity, gas and water	3.0
Construction	0.3
Wholesale trade	1.9
Retail trade	-0.1
Accommodation, cafes and restaurants	-1.6
Transport and storage	1.2
Communication services	5.3
Finance and insurance	1.8
Cultural and recreational services	-2.1
Market sector	1.0

Source: Productivity Commission, 2000.  Update of Productivity Estimates: Industry Sector Productivity, 1998-99.

The Productivity Commission also recalculated the capital-labour ratio in producing these estimates, and found that construction had a ratio of 2.1 (two units of capital to each worker) compared to a ratio of 3.5 for the market sector as a whole.  Other industries with low capital intensity (ratio under 2) were agriculture and transport.  The high capital intensity industries (ratio over 5) were mining, manufacturing, utilities and retailing.

Recent data at the industry level for the United States is similar to Australia.  Gullickson and Harper (1999) give estimates of MFP by industry for the US.  The table shows the estimates of multi-factor productivity growth rates for the industries in the US private business sector.  The two sets of multi-factor productivity estimates are based on industry output series from the BEA and from the BLS.  These trends differ by more than 0.5% for only one industry (utilities).  There are negative multi-factor productivity trends for construction and for oil and gas.

Table A3.3       Estimates of US multi-factor productivity trends in industries, percent per year.

Industry	Bureau of Labor Statistics		Bureau of Economic Analysis
	1963-77	1977-92	1977-92
Farms	0.8	1.8	1.7
Mining	-1.1	-1.2	-1.5
Construction	-0.7	-0.4	-0.9
Manufacturing	0.6	0.5	0.7
Transportation	1.9	0.4	0.2
Communications	2.4	0.4	0.9
Electric, Gas, and Sanitary Services	0.4	-0.3	-1.1
Wholesale Trade	2.6	2.1	1.0
Retail Trade	1.7	0.3	1.2
Finance, Insurance, Real Estate	0.7	-1.2	-1.3
Hotels and Other Lodging Places	1.5	-3.5	-0.1
Personal Services	2.3	0.7	0.0
Amusement, Recreation Services	-0.1	-0.3	1.7

Source: Gullickson and Harper 1999: 56.

International Comparison of Productivity

Despite the difficulties in the measurement of productivity in general, and for the construction industry in particular, some studies have found that the level of productivity in the Australian construction industry compares well with overseas industries.  Significantly, both these studies are for periods (1990 and 1995-96) when residential building was at a low point in the cycle.  Because residential building is the most labour intensive part of the industry, this lifts the overall level of productivity by improving the output to hours worked ratio.  An OECD study by Pilat (1996) found that Australian construction labour productivity (output per person based on National Accounts data converted with 1990 purchasing power parities) is above that of the US, Japan and all European nations, only Canada had higher construction output per person.

Table A3.4       Index of construction output per person, 1990 (USA=100)

Country	Labour Productivity
United States	100.0
Japan	79.7
Germany	75.5
France	83.3
Italy	84.2
United Kingdom	62.0
Canada	148.2
Australia	103.0
Austria	99.4
Belgium	90.1
Denmark	65.8
Finland	94.4
Iceland	69.1
Luxembourg	61.6
Netherlands	69.9
Norway	68.5
Portugal	38.5
Spain	86.8
Sweden	75.2
Turkey	49.1

Source: Pilat 1996: 21.

The McKinsey study of Australian construction was also positive in its conclusions (Lewis et al 1996).  The study found the Australian construction industry had made a number of positive changes since the 1980s, including the development of more harmonious working relationships and the introduction of multi-skilling.  The effect had been dramatic: average productivity is now close to the world’s best, and employment performance has been just as impressive.  Labour productivity, at 95% of best practice, was only just behind the United States, and on a par with Germany’s.  In addition, construction costs were low, slightly less than those of the United States and France and far below those of Germany, Sweden, and Japan.  The main drivers of Australia’s high productivity were intense competition in the industry, which encouraged the widespread transfer of innovative production processes, and improved industrial relations that increased labour flexibility and minimized time lost through industrial disputes.  Despite that, many more firms need to adopt international best practices in construction techniques and processes.  McKinsey found Australia owed its success to greater demand for housing and infrastructure and lower prices.  To raise productivity further and stimulate growth, McKinsey recommended the industry maintain or increase the rate at which it develops and transfers innovations, and continue to explore opportunities to expand into overseas markets.

Table A3.5       Construction compared internationally

Country	Productivity	Employment
United States	100	-0.1
Australia	95	-3.5
Germany	95	-9.9
France	85	-12.9
Japan	71	na
Sweden	67	-7.6

Note: Productivity is value-added per hour worked, index US = 100.  Employment is jobs created per thousand working age population.

Source: Lewis et al 1996: 99.

McKinsey concluded construction firms should seek collaborations with their large customers, especially industrial firms, to reduce capital expenditure and improve project economics in such fields as mining and new factory development.  Close working relationships of this kind have the potential to boost both capital productivity and profitability.