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.

Cities and Built Environment Policies

Why measuring the built environment sector is important

One of the Turnbull Government’s points of difference with its predecessors is the focus on cities and the built environment. When announcing his first ministry Malcolm Turnbull said: “Liveable, vibrant cities are absolutely critical to our prosperity. Historically the Federal Government has had a limited engagement with cities and yet that is where most Australians live, it is where the bulk of our economic growth can be found.” He then identified productive cities, housing affordability and transport diversity and integration as issues.

Cities are at the heart of the emerging digital economy and society, and these days there are a range of different’ big picture’ ideas about what cities can or should be: creative cities, functional cities, nodal cities, compact cities and so on. In Australia the emphasis has come to be on planning and productivity, although this consensus is a fairly recent event, and has yet to extend much past the major public and corporate stakeholders involved.

Cities as economic and social phenomena are also enormously varied and complex. Significantly, there is also an industry, or collection of industries, that creates and maintains cities. The building and construction industry, at around 7 percent of gross domestic product, is the core, but the role of the construction industry linking suppliers of materials, machinery, products, finance, professional and technical services is also important.

These two views have been called broad and narrow, with the narrow industry defined as on-site activities of contractors and subcontractors and the broad industry as the supply chain of materials, products and assemblies, and services. The term that arguably best encompasses the extraordinarily large number and range of participants in the creation and maintenance of the built environment, from suppliers to end users, is the built environment sector.

Based on the studies that have quantified the relationship between the narrow and broad definitions of construction it is reasonable to conclude the wider industry is around twice the size of the narrow industry. The 2003 UK report by David Pearce on The Social and Economic Value of Construction found contractors accounted for around half the total of employment, the number of firms, their turnover and value added, in the five industry groups included in the broad definition. An Australian study in 1999, Mapping the Building and Construction Product System in Australia by the Australian Expert Group on Industry Studies, found the narrow industry is 51 percent of income and 48 percent of employment in the broad industry.

The way to turn this rough estimate into a more credible measure would be through the preparation of what is known as a satellite account, which reclassifies expenditures usually presented in different industry groupings into a single sector. These are used to provide more detail on sectors that are not adequately represented in the national accounts. A previous post discussed these.

At this time the most widely found satellite account is for tourism (nine countries, all irregular, often jointly funded by industry and users), but they have been produced or proposed for a range of other industries such as health, the environment, R&D, information technology, infrastructure, non-profit institutions, human capital and households. Built environment sector is also the obvious choice of a name for a set of satellite accounts.

The reason understanding the extent and of the role of the built environment sector is important is that, despite repeated policy efforts by governments across a wide range of issues, the built environment is often seen as under-performing, based on measures such as housing affordability, traffic congestion and flows, amenity and access to services, energy efficiency and carbon abatement, water capture and so on.

An important part of the explanation for the difficulty in getting significant outcomes through policy interventions is the under-appreciated complexity of the built environment sector, partly due to the fact we don’t adequately measure its role and extent. Getting a better definition and integrated data would allow better monitoring of the effectiveness of future cities and infrastructure policy initiatives.

It is unlikely any single policy would address the complexity of the built environment sector, and why and how the many overlapping layers of users, clients, regulators, creators, providers, maintainers and managers makes effective policy implementation very difficult. In particular, the multiple layers of approval processes and the lack of inspection and enforcement of standards are critical issues that the Commonwealth Government typically affects indirectly. Across Australia there is great diversity in state legislation, and regulation of building and construction is typically distributed across several departments within states.

Clearly, the sector is over-regulated, and therefore it is not surprising it is under-performing. Much of the regulation is inefficient or ineffective, sometimes due to regulatory capture, but really it’s a case of policy accretion over time. The real problem is that much of the regulatory framework is aging badly, some parts are now decades old, and is poorly adapted to the rapid pace of development in construction technologies and products.

The Government also has the Productivity Commission report on Infrastructure to consider. Many of the recommendations in that report are serious and, in some cases, significant reforms to the selection, financing, tendering and contracting of major building and construction projects. Their application extends past engineering infrastructure to the rest of the built environment sector. The recommendations provide an outline of what an industry policy backed by Commonwealth funding for new cities and built environment projects could look like. There are many possibilities. Tax exempt infrastructure bonds targeted at self-funded retirees issued by a statutory authority that decides on the projects might be politically attractive.

Malcolm Turnbull’s agenda for cities set three main policy goals: integrated planning, infrastructure funding and ‘greening’ cities. In the past a set of policies like these would be seen as affecting a diverse number of industries, or industry sectors. Bringing these industries together as the built environment sector, and measuring that sector’s development and performance, could make an important contribution to policy initiatives in related areas such as energy, transport and so on.

With the election campaign now launched there is a general expectation that cities and built environment policy proposals will emphasise planning and productivity issues. There is an opportunity  here to integrate those proposals with the emerging narrative from the Government of lifting Australia’s rate of productivity growth, levels of research and innovation, and facilitating the transition from our recent but now past resources economy to a modern, post-industrial information and services economy.