Investment in Physical and Intellectual Capital in 2023

 Australian capex in machinery and equipment, software and R&D 

 

 

The 2023 Australian System of National Accounts provided by the ABS includes data for industry investment in software, research and development (R&D), and machinery and equipment (M&E) [1]. Industry investment in physical and intellectual assets plays a vital role in economic growth through building capacity, upgrading technology, and increasing the productivity of workers.

 

This post compares the capital expenditure of 18 Australian industries in 2023 starting with M&E, then software followed by R&D, with industries ranked by expenditure. The ABS estimates of each industry’s net capital stock [2] are also included, with industries again ranked by expenditure. The third figure for each category compares each Industry’s share of total capital stock to the industry’s share of GDP. 

 

 

Machinery and Equipment 

 

With expenditure of $120 billion in 2023, M&E is by far the most important component of investment by Australian industry. In Figure 1 Australian industries are sorted by M&E capital expenditure in 2023, from lowest to highest. The two industries of Mining and Transport spent over $15 billion, Manufacturing spent over $10 billion, and Construction and Agriculture each spent around $9 billion. Those five industries accounted for 51 percent of total M&E capex, which however is more distributed than Software and R&D capex. The next five industries include three that spent between $6 and $7 billion, and two that spent between $5 and $6 billion. 

 

Figure 1. Industries ranked by machinery and equipment capital expenditure

 

Source: ABS 5204

 

Economic growth can come from either increased amounts of capital per worker or from technological progress and increased productivity. Since the financial crisis in 2006 the share of GDP of M&E capex has been falling, from eight to around four percent, and is now half the level it was before the financial crisis despite the decline in interest rates to 2021. With less investment the capital stock grows more slowly, leading to slower growth in output and therefore lower productivity. With a low rate of growth firms may not invest, or invest less, in expanding capacity and innovation (innovation was discussed in the previous post). The result is less economic dynamism and increasing economic inefficiency, leading to lower growth in productivity and GDP.

 

Very broadly, the net capital stock of M&E in each industry is around eight times their annual capex. Although a few industries like Electricity and Health move a couple of places, the ranking in Figure 2 generally follows that of annual expenditure. Agriculture and Construction swap places, but the top five industries are the same and they account for 45 percent of the total net capital stock. Those five asset heavy industries are by far the most capital intensive in Australia, particularly when compared with the bottom six service industries that only have between $10 and $25 billion in M&E capital stock. 

 

 

Figure 2. Net capital stock of machinery and equipment by industry

 

Source: ABS 5204

 

 

When the share of total capital stock for each industry is compared to its share pf GDP no real pattern emerges. Agriculture, Transport, postal and warehousing, and Rental, hiring and real estate services all have M&E capital stock shares that are much larger than GDP shares. Manufacturing and Electricity, gas, water and waste also have larger M&E shares. For Construction, Mining, Retail and Wholesale trades, and Accommodation and food services M&E shares are slightly higher than their GDP shares. On the other side are Health care and social assistance, Professional, scientific and technical services, Finance and insurance, and Education and training with M&E capital stock shares well below their GDP shares. 

 

Figure 3. Industry shares of M&E capital stock and GDP compared

 

Source: ABS 5204. GDP in current dollars at basic prices [3]. 

 

 

Intellectual Property: Software

 

Figure 4 shows industries ranked by capital expenditure on software, which is markedly different from the M&E rankings where Mining and Transport were the largest. Professional, scientific and technical services, which includes computer systems and IT services, with $5.7 billion had the biggest expenditure. Built environment related professional services like architecture, engineering, quantity surveyors and project management are also in this industry. [4].  

Finance and insurance with $3.7 billion and Information, media and telecommunications with $3 billion are the second and third largest. Three other industries spent over $2 billion, and those six industries accounted for 64 percent of the total. The top five industries accounted for 55 percent. Construction had the twelfth largest capex, and was sixth from the bottom in software capex. Total Software capex was $31 billion in 2023. 

 

Figure 4. Industries ranked by software capital expenditure 2023

 

Source: ABS 5204

 

The ranking of industries by software capital stock follows that for capex, with the exception of Manufacturing, which falls a couple of places to 12. Broadly, the value of software capital stock is a bit more than twice the value of 2023 capex, indicating a rapid depreciation rate for software of around three years. The top five industries in Figure 5 accounted for 57 percent of software capital stock. Construction remains at twelfth. 

 

Figure 5. Software net capital stock by industry 2023

 

Source: ABS 5204

 

The comparison of Software capital stock and GDP shares is dramatically different to the M&E shares. Here Professional, scientific and technical services, Finance and insurance, Information media and telecommunications, Transport, postal and warehousing, and Electricity, gas, water and waste have much larger capital stock shares than GDP shares. Agriculture, Construction, Mining, Manufacturing, Education and training, Accommodation and food services, and Health care and social assistance, have smaller shares. For Retail and Wholesale trades, Rental, hiring and real estate services, and Public administration and safety the shares are similar. 

 

Figure 6. Industry shares of software capital stock and GDP compared

 

Source: ABS 5204. GDP in current dollars at basic prices [3]. 

 

 

Intellectual Property: Research and Development

 

In Figure 7 industries are ranked by capital expenditure on R&D in 2023, from lowest to highest. Construction with $200 million is third from bottom and has the lowest R&D spend of any of the major goods producing industries like Agriculture, Mining and Manufacturing, which with $4.8 billion had the second largest investment in R&D. Professional, scientific and technical services, which includes the IT and computer services industries, had by far the largest R&D spend with $7.7 billion in 2023. There are five industries with capex above $1 billion, and those five accounted for 77 percent of all R&D expenditure.

 

Figure 7. Industries ranked by research and development capital expenditure

 

Source: ABS 5204

 

Capital expenditure on software is much more important than R&D for most Australian industries, the three exceptions where R&D was greater than software were Agriculture, Mining and Manufacturing. Some industries with low R&D capex are among the largest in software capex, such as Transport, postal and warehousing and Electricity, gas, water and waste. It is not uncommon for software capex to be many multiples of R&D, such four times more in Construction and five times more in Electricity.

 

The industry rankings change with the current value of R&D net capital stock, particularly for Agriculture and Mining where the value is relatively low. The leading seven industries are still leaders, Health is eight, Electricity is nineth and Construction is now at ten, ahead of Retail and Real estate services. The top five industries account for 76 percent of all R&D capital stock. 

 

 

Figure 8. Net capital stock of research and development by industry

 

Source: ABS 5204

 

The comparison of R&D capital stock and GDP shares highlights how concentrated R&D is in Australian industry. Only three industries have significantly larger capital stock shares: Professional, scientific and technical services, Finance and insurance, and Manufacturing. Three more have slightly larger shares, Information media and telecommunications, Education and training, and Public administration and safety. For all other industries their R&D capital stock share is less than their GDP share. In industries like Agriculture, Construction, Transport, and Retail the R&D shares are much smaller than GDP shares. 

 

Figure 9. Industry shares of R&D capital stock and GDP compared

 

Source: ABS 5204. GDP in current dollars at basic prices. 

 

 

Conclusion

 

Industry investment in physical and intellectual assets plays a vital role in building capacity and upgrading technology. Between the 18 industries the ABS provides data on the level of investment varied widely in 2023, with the share of capex of the top five industries increasing from 51 percent in M&E to 55 percent in Software to 77 percent in R&D. However, different industries are in the top five. 

 

In M&E capex in the top five industries Mining and Transport, postal and warehousing have much larger capex and capital stock than the next three industries of Manufacturing, Construction, and Agriculture. Policies to increase M&E investment could target those industries, although because M&E capex is more distributed than Software and R&D capex across the leading dozen industries a more general approach has traditionally been taken.

 

 In Software the largest expenditure was by Professional, scientific and technical services, Finance and insurance, Information, media and telecommunications, and Public administration and safety. R&D capex is highly concentrated in a few industries. Professional, scientific and technical services, Manufacturing, and Finance and insurance had the largest expenditure. For Software and R&D, capex policies that target the top three or four industries would be most effective. 

 

Economic growth can come from increased capital per worker or from technological progress and increased productivity. With investment the capital stock grows, and a low level of investment means slower growth in output, lower productivity, less economic dynamism and increasing economic inefficiency. 

 

The net capital stock of M&E in each industry is around eight times their annual capex, and ranking generally follows that of annual expenditure. The ranking of industries by software capital stock also follows that for capex, with the exception of Manufacturing, and the value of software capital stock is a bit more than twice the value of 2023 capex. industries with low R&D capex are among the largest in software capex, such as Transport, postal and warehousing and Electricity, gas, water and waste. It is not uncommon for software capex to be many multiples of R&D, such four times more in Construction and five times more in Electricity. Unlike M&E and software, the R&D capex industry rankings change for net capital stock, particularly for the low capital stock industries of Agriculture and Mining. 

 

For M&E net capital stock the top five asset heavy industries account for 45 percent of the total, and are very capital intensive compared with many service industries. The top five industries in software capital stock accounted for 57 percent.  The top five industries account for 76 percent of all R&D capital stock. The comparison of R&D capital stock shares and GDP shares highlights how concentrated R&D is in Australia, with only three industries having significantly larger capital stock shares.

 

The industry Professional, scientific and technical services includes computer systems design and has the highest expenditure on both software and R&D, has the largest capital stock, and a much larger share of total capital stock than GDP for them. For Australia this is the leading industry for intellectual property software and R&D investment and capital stock. Because this is the industry that includes scientific research and IT systems and services this is not surprising, but the wide gap between this industry and all the others suggests it has a specific and special role in the economy, and industry policy should reflect that.

 

 

 

 

[1] The data used here is from Tables 63 and 64 of ABS 5204, which comes out twice a year in February and October. All figures in this post are in current dollars, but the publication includes constant dollar estimates for expenditure since 1960. 

 

[2] Gross capital stock values each asset in use at the current price, Net capital stock is the written down value of gross capital stock. The difference between the net and gross value is accumulated depreciation.

 

[3] The basic price is the amount retained by the producer in respect of the good or service that is produced as output, minus any tax payable (including deductible value added taxes) plus any subsidy receivable. 

 

[4] Professional, scientific and technical services include scientific research, architecture, engineering, computer systems design and related services, law, accountancy, advertising, market research, management and other consultancy, veterinary science and professional photography. 

 

 

Innovation in Australian Construction

 ABS 2023 survey of business innovation and use of information technology

 

 

The Australian Bureau of Statistics Business Characteristics Survey is an annual survey on business innovation and use of information technology. The 2022-23 survey was recently released, and this post has extracted some of the results for the Construction industry.

 

First a few definitions. The ABS defines innovation as ‘the introduction of a new or significantly improved good or service; operational process; organisational or managerial process; or marketing method.’  Innovation activity is ‘any work that was intended to, or did, result in the introduction of an innovation.’ Firms are divided into innovation active and non-innovation active. An innovation-active business is one that introduced any type of innovation, had an innovation in development or abandoned one in the two years ended 30 June 2023.  An innovating business is one that introduced any type of innovation during the two years. 

 

The Business Characteristics Survey collects data on innovation and digital activities in alternate years, and the 2022-23 survey was on innovation. Approximately 7,000 businesses were surveyed by questionnaire, with a response rate of 82.5 percent [1]. The survey covers a wide range of factors and issues, with the data given by industry, employment size, and state. The data is shown as a percent of businesses within the estimated total number of businesses.

 

Firm Size and Innovation

 

For Construction, 30 percent of businesses introduced a ‘new or significantly improved innovation’ compared to 39 percent of all businesses. However, Construction with 35 percent of innovation active businesses compares poorly to the all industries proportion of 46 percent, and out of all industries Construction has the second lowest proportion of innovation active businesses. 

The difference between large and small employers was significant, with 31 percent of Construction businesses employing 0–4 persons and 43 percent of those employing 5–19 persons innovation active, compared to 79 percent of those employing 20–199 persons and 60 percent of those employing 200 or more persons innovation active. Table 1 shows these proportions are similar for businesses that introduced an innovation or had one under development in 2023. Medium size Construction employers with 20-199 people were most likely to have abandoned an innovation [2]. 

 

Table 1. Innovation status by employment size

 

 

Innovation Activity

 

Innovation active Construction businesses reported better outcomes than non-active ones. As Figure 1 shows, they were more likely to have introduced a new product or service, and their increase in sales, profitability and productivity over the previous year was greater than non-innovation active businesses. The number of innovation active businesses reporting increased profitability and productivity was twice the number of non-active businesses. 

 

Figure 1. Businesses reporting an increase

Source: ABS 8158

 

As a side note, it is interesting that for all construction 21 percent of businesses reported an increase in productivity, and 47 percent no change. There were also 19 percent of businesses with a decrease in productivity, Therefore, the overall industry level ends up without growth as the majority of businesses with decreasing or no growth cancel out the productivity increase in the other one fifth of businesses. The number of SMEs and the low level of innovation in Construction are important factors in the lack of productivity growth [3].

 

There were 13 percent of Construction businesses that introduced a new or improved good or service. Although 31 percent of those innovations were new to Australia or the industry, 75 percent of them were new to the company. Figure 2 shows the percentage shares of that 13 percent of businesses with new or improved goods or services by employment size, with 37 percent of businesses employing 20-199 persons and 25 percent of businesses employing over 200 introducing an innovation. Only 12 and 10 percent of micro and small innovators had an improved good or service. Around half of these goods and services innovations were developed internally. 

 

Construction businesses are three times more likely to introduce a process innovation compared to a new good or service. There were 39 percent of Construction businesses that introduced a new or improved process, of which 3 percent were new to the world. Another 11 percent of those innovations were new to Australia or the industry, and 87 percent of them were new to the company. Figure 2 shows the percentage shares of that 39 percent of businesses with new or improved processes by employment size, with 73 percent of businesses employing 20-199 persons and 62 percent of businesses employing over 200 introducing an innovation. For micro and small firms with a process innovation, the percentage of innovators was 24 and 53 percent respectively. Two thirds of process innovations were developed internally. 

 

Figure 2. Innovation active businesses by type of innovation and size

Source: ABS 8158

 

Although only 15 percent of innovation active businesses reported having an innovation strategy as part of the business plan, 19 percent sought out partners to collaborate with, compared to none and 9 percent for non-active businesses. The main sources of ideas were from within the company (54 percent), clients (36 percent) and suppliers (33 percent), followed by competitors (23 percent), consultants (17 percent) and industry association (13 percent). Only 2 percent reported sourcing ideas from universities, and none reported any research collaboration with universities. 

 

Digitisation and IT

 

Differences in investment in information and communication technology (ICT) capabilities between innovation active and non-active businesses was marked.  Figure 3 shows more innovation active businesses increased expenditure on cyber security, IT and training in 2023, and only 8 percent of non-active businesses increased expenditure on ICT. Significantly, nearly 25 percent of innovation active Construction businesses increased their use of digital technologies but no non-active businesses did, highlighting the growing divide in the industry between those firms that are digitising their operations and those that are not. 

 

Figure 3. Businesses reporting an increase

Source: ABS 8158

 

The weights given to factors considered important for digitisation in construction are generally similar to other industries, particularly in access to skills and capability building. However, there is a greater knowledge gap in construction and less investment in digital technologies compared to all industries, and only 7 percent of Construction businesses had a digital business strategy, compared to 12 percent of all businesses. 

 

 

Figure 4. Digitalisation factors important to the business's innovative activity

Source: ABS 8158

 

 

Benefits and expenditure

 

The benefits of innovation for Construction businesses were found to be similar to other industries, although a reduction in costs was not as common. In Figure 5 there are, however, two benefits where construction businesses did notably better than other industries, in improved safety and environmental benefits. The safety result is no doubt due to the importance of improving safety in one of the most dangerous industries, and with 25 percent of businesses reporting and improvement this is a good indicator of industry improvement. Similarly, there were nearly twice as many Construction businesses reporting improved environmental benefits, 14 percent, compared to 8 percent for all businesses, which is probably reflecting industry efforts to reduce waste and energy consumption. 

 

Figure 5. Type of benefit from innovation

Source: ABS 8158

 

 

As Figure 6 shows, at 35 percent Construction has the second lowest proportion of innovation active businesses, Agriculture is lowest with 34 percent and Information media and telecommunications highest with 63 percent. The ABS found 37 percent of Construction businesses spent nothing on innovation, and for 50 percent of innovation active businesses expenditure on innovation was only up to $25,000. 

 

At the other extreme, 6 percent of businesses spent between $50,000 and $250,000, and 4 percent more than $250,00. Only 5 percent of Construction businesses got Government financial assistance, and most of them received it from state governments. For a quarter of businesses a shortage of funds was a barrier to innovation, and one third of Construction innovation was targeted at products or processes internal to the business [4].

 

Figure 6. Proportion of innovation active businesses

Source: ABS 8158

 

 

What Can Be Done to Increase Innovation?

 

The ABS survey highlights the many issues in Construction innovation. Only 12 percent of businesses reported having a digital culture, few innovations were new to the world, and expenditure on innovation was low. Innovations came from within the business or from clients, suppliers and competitors, not universities or research organisation. How could this performance be improved?

 

The survey did not ask specifically about R&D tax rebates, but it is unlikely these will have been claimed by many businesses because of their complexity, difficulty to substantiate, requirements for documentation, and the lack of familiarity with the rebate for accountants doing SME tax returns. This may be an area where industry associations might help by providing information, standardised forms and lists of qualified advisors and accountants. 

 

There are very many startups offering software solutions for construction, and a recent phenomenon has been the billions in venture capital going into construction technology. Setting up a demonstration and testing centre for contech is a possible area for collaboration between construction companies, with perhaps government. The centre would provide reports with evaluations of specific systems such as embodied carbon estimators, procurement platforms for materials and components, financial and timekeeping software, robotic and safety management systems. For construction firms, particularly SMEs, getting started on digitisation or choosing new software is challenging because there are so many offerings and no impartial reviews of their quality and suitability. 

 

Large firms such as tier one contractors and manufacturers could be the centre of an innovation consortium, where they coordinate the efforts of a number of smaller firms in developing and applying an innovation. This could be short-term partnership, probably one or two years, focused on a specific innovation and making it work. For example, a contractor with some subcontractors could work together on a new or improved process, or a manufacturer with some customers could work on a new or improved product. This would improve the industry’s innovation culture and increase participation in innovation activities, and might also get access to the tax rebate for SMEs.

 

A previous post argued for BIM mandates. That post concluded ‘BIM mandates are important because the use of BIM unlocks the potential of digital construction, and affects the organisation of suppliers of materials, products and services for construction of the built environment as well. The deeply embedded nature of the culture and processes of this production system, and the large number of small firms involved, slows technological diffusion and limits voluntary uptake of new technologies like BIM. Therefore, government mandates in particular and client’s mandating BIM in general are needed.’

 

BIM mandates are a blunt instrument and do not address the problems of cost, difficulty of use, and entrenching the few providers of the systems. However, large contractors doing major projects already have BIM capabilities, so making BIM a requirement on major projects is not problematic. It is an issue for SMEs and on smaller projects where the cost is not justified, although an interesting question is where the cutoff point is. Unfortunately, at present there is no alternative to BIM as the path to digitised construction. 

 

What else could government do, beside simplify the tax rebate and mandate BIM for major projects? Investment in digital capability through training and skills is needed. An example is the NSW Institute of Applied Technology that opened in 2023 as a collaboration of three universities, TAFE, Microsoft and CPB Contractors, with a microcredential stream in construction that has subjects in CAD, BIM, cloud computing, automation and robotics. 

 

More funding to develop new standards for prefabrication and modular building for the Australian Building Codes Board would be good, as this would speed up the process and help get the insurance and finance industry support needed for this part of the industry to grow and reach its potential. The June Building Ministers Meeting considered ‘a national scheme supporting the safety and reliability of building products’ and ‘noted the ongoing engagement .. with industry to support greater use of prefabricated and modular construction methods.’ Obviously still a long way to go there. 

 

Conclusion

 

The Business Characteristics Survey is a relatively new publication from the ABS, this is the second time it has run. The survey collects data on innovation and digital activities in alternate years, and the 2022-23 survey was on innovation. The results are presented as the percentage of businesses that undertook innovation related activities that resulted in new or improved goods or services or an improvement in processes.

 

Over the two years to 2023, 30 percent of construction businesses introduced a new or significantly improved innovation, 35 percent were innovation active and 50 percent of them spent up to $25,000 on innovation. Innovation active businesses increased their sales, profitability and productivity more than non-innovation active businesses. Innovation active Construction businesses were three times more likely to introduce a process innovation compared to a new good or service, with 39 percent introducing a new or improved process.

 

There are significant differences between large and small employers, with 31 percent of Construction businesses employing 0–4 persons and 43 percent of those employing 5–19 persons innovation active, compared to 79 percent of those employing 20–199 persons and 60 percent of those employing 200 or more persons innovation active. Micro and small firms also reported more difficulty in funding innovation activities and were less likely to have an innovation under development in 2023. The low level of innovation is an important factor in the lack of productivity growth in Construction, and the number of SMEs affects the industry’s level of innovation.  

 

Differences in investment in IT between innovation active and non-active businesses was marked. Innovation active businesses increased expenditure on cyber security, IT and training but only 8 percent of non-active businesses increased IT expenditure. Nearly 25 percent of innovation active businesses increased their use of digital technologies, but no non-active businesses did, highlighting the divide between firms that are digitising and those that are not. At 35 percent, the survey found Construction is the industry with the second lowest proportion of innovation active businesses.

 

 The ABS survey highlights the many issues in Construction innovation. How could this performance be improved? Access to R&D tax rebates may be an area where industry associations could provide information, standardised forms and lists of qualified advisors and accountants. A demonstration and testing centre for contech is an area for collaboration between construction companies, with perhaps government. Innovation consortiums could improve the industry’s innovation culture and increase participation in innovation activities. BIM mandates should be used on major projects. Government could increase investment in digital capability through training and skills, and funding to develop new standards. A goal of increasing innovation active construction businesses by 50 percent over a decade would take the industry from the bottom toward the top of Australian industries. 

 

[1] The ABS estimate for the total number of businesses was 1,016,252, so a survey of 7,000 is 0.7 percent. There were 193,844 construction businesses and if 0.7 percent were surveyed that would be around 1,350 in the survey sample. 

 

[2] The estimate of the number of construction businesses employing 0–4 persons was 142,242, for those employing 5–19 persons was 41,042, employing 20–199 was 8,494 persons, and employing 200 or more persons was 166. 

 

[3] A recent Reserve Bank Research Paper by Majeed, Hambur and Breunig on Monetary Policy and Innovation found ‘ monetary policy, both domestic and foreign, and economic conditions can have medium-run effects on productivity and output by influencing the amount of innovative activity that occurs.’ In the three years after an increase in interest rates innovation by SMEs was much more affected than innovation in large firms employing more than 200 people, and ‘contractionary monetary policy shocks lead to an increase in the likelihood that firms report that lack of funds is significantly hampering their ability to undertake innovation. This is almost entirely driven by SMEs, which is consistent with the evidence that SMEs have a larger decline in innovation following a monetary policy shock’. For Construction this confirms both that the low level of innovation is an important factor in the lack of productivity growth, and the number of SMEs affects the level of innovation.  

 

[4] The ABS notes that there is a high degree of uncertainty around many of the survey results, particularly for the employment size data, because of the sample size. 

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.