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IR backpedals over the boom


12 August 2011

There are warning signals flashing over Australia's resource boom. If not heeded, the expected boom could be significantly curtailed.

Some months ago I consulted widely with senior executives in the resource recruitment sector. They universally reported no labour shortage other than in some limited specialised areas. Robert Gottliebsen reported on this, giving the example of one mining recruitment drive for 75 positions attracting more than 2,500 applicants (Contractors in a cold sweat, June 25, 2011).

This information is puzzling. If there's no labour shortage why isn't this showing up in employment data? Why do we hear so much about a skilled labour shortage? The recruitment executives respond that the shortage is anticipated---not current.

Two pieces of data emerged last week filling in this puzzle.

The first was from a presentation from Leighton Holdings. The graph below shows forecast labour needs for construction, including the resource sector. The uptake in labour demand does not start until late this year, assuming planned projects start on time. This supports the observation that the labour shortage is anticipated not actual.



The second was the latest employment data from Roy Morgan Research. July experienced the largest fall in employment ever recorded by Roy Morgan Research---418,000---and a small increase in unemployment.

The picture painted by the recruitment executives now makes sense. Sure, the mining sector is producing a boom in export income but that's from existing mines. Under the 'two-speed' economy scenario the rest of the economy is struggling.

Roy Morgan Research provided the first hard data of this hitting the labour market. Yesterday's labour figures provided further evidence, with a surprise up-tick in the unemployment rate and near flat job creation. If the resource boom benefits are to take up the slack emerging in the rest of the economy, we're heavily reliant on new resource and infrastructure project construction.

In this sense the Australian economy sits at a tipping point. We need the new resource projects to be built on time and within budgets. There's emerging evidence that this is becoming difficult and it's causing reassessment of the viability of projects.

A primary contributor is a rapid return to old-style 1970s industrial relations problems in construction and mining.

My most recent analysis of this related to industrial arrangements for the national broadband network construction. I've predicted that these arrangements will result in significant NBN construction budget overruns.

The problems are a direct outcome of the neutering of the Australian Building and Construction Commission and the introduction of the Fair Work Act by the Gillard Labor government. I warned about this in early 2010 (WAKE UP AUSTRALIA: Don't dump the ABCC, January 27, 2010). The impact is now evident in the resource sector.

Take the Western Australian Gorgon project---Australia's, and the world's, largest liquefied natural gas project. A total of $10 billion in contracts has been allocated of a planned $43 billion construction spend, employing 6000 people at its construction peak.

Consistent with the graph above, the labour uptake is still to begin. But even before construction has ramped up, Gorgon has locked in industrial relations strife. I predict this will result in major cost blowouts.

Last week, the Fair Work Authority gave control of the Gorgon construction workforce to two bitterly opposed and warring unions with a long history of industrial confrontation. This blew up in Victoria in 2009-10 on the $240 million West Gate Bridge upgrade.

The 'peace settlement' added about an additional $50 million to costs. That 20 per cent cost blow-out is consistent with analysis I've done on numerous other construction projects.

The West Gate Bridge fight was the warm-up to the now infamous $5 billion Victorian desalination project. On my estimates, the bad IR deals being used added up to $1 billion to the budgeted cost. It's a fixed price job. Industrial turmoil on site has turned a Leighton Holdings budgeted profit into a loss. Last week, Leighton Holdings announced "a further forecast deterioration of $278 million" with industrial confrontation listed as a major factor.

Gorgon has the same industrial relations elements in play as have been witnessed on the West Gate Bridge and the Victorian desalination plant. Contemplate adding a potential 20 per cent cost overrun to $43 billion and see what investors and bankers think!

There's some talk of new resource projects being delayed now, due to upward revisions in construction costs heavily related to labour issues.

Here's the warning: since 2009, statutory and enforcement discipline has been removed from industrial relations arrangements in construction. There's evidence of a rapid return to 1970s-style behaviour and perhaps worse. If this continues and locks in, expect to see resource projects delayed and even cancelled. It's a likely scenario that would significantly damage Australia projected resource boom.


From the Business Spectator, August 2011.

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