As the Productivity Commission finishes its draft report into workplace relations, one question it must ask is why does the system create high cost, low productivity projects? AmCham Human Capital Committee chairman and Seyfarth Shaw partner Chris Gardner considers the issue in a opinion piece for the Australian Financial Review.
Chris Gardner, Seyfarth Shaw
Last week, the Australian oil & gas Industry converged for its annual conference hosted by the Australian Petroleum Production & Exploration Association. The conference illustrated the great opportunities Australia has in LNG. It also served as a reminder that realising these opportunities depends upon deep investment in project infrastructure. Alas, we are expensive by international standards. Labour cost and productivity are becoming burning issues with our relative position poor by international standards.
As the Productivity Commission puts the finishing touches on its draft report into the workplace relations framework, a key question it will need to answer is, “What is it about the regulatory environment that drives high cost and low productivity outcomes on major projects?” Let me help.
First, there is what I call horizontal price control between projects.
This is the phenomenon which sees the price of labour set from one project to another, with the most recent project providing the starting point for the next.
The owners and developers of a new project have significant capital at play. They cannot afford for it to sit idle. Delay is untenable. The prospect of industrial action risks delay. Under the existing regulatory framework, the only real option to ameliorate the risk is a “greenfields” (enterprise) agreement. Such an agreement can only be made with one or more unions.
In effect, unions are put in a monopoly position for the supply and price of labour. “Price” is thereby distorted by this alone. Of course, it’s not just price, rostering arrangements often aimed at maximising overtime pay and union-control clauses are also in the mix.
The previous federal Labor government’s inquiry into the Fair Work Act acknowledged this dynamic, as did the Productivity Commission in its report last year into public infrastructure where it noted that, “unions routinely use the commercial risk faced by contractors as a lever to secure industrial concessions”.
This is not a criticism of union negotiating behaviour, it is a function of regulatory shortcomings. The issue has been raised squarely by the Productivity Commission again in its current inquiry into the workplace relations framework and has been the subject of a number of submissions.
There is also “vertical price control”. This is where the price of labour is set at the top of the project supply chain and is demanded of any and all sub-contractors throughout. Head-contractors effectively drive this outcome.
Sub-contractors are then limited in their ability to establish their own terms and conditions, and often the price of labour is standardised at the highest common denominator. Given this practice is fundamentally anti-competitive, why do economically rational, well-resourced players in key sectors of our economy accept it?
The project owner and head contractor need stability and certainty to deliver projects on time and it’s this quest for stability which is regularly offered as the reason – or at least a key reason. The question then for the Productivity Commission is, “to what extent is any regulatory shortcoming the underlying driver for the instability which is sought to be avoided?”
The link between investment in major projects (whether in resources or otherwise) and our labour relations environment is obvious and seemingly well accepted, so the practices relating to greenfields agreements and enterprise bargaining more generally will be a key focus for the Productivity Commission.
Fundamentally, the link between the “levers and pulleys” under the legal framework and negotiating behaviour needs to be understood. There are three dimensions here. First, evaluating where leverage sits as between the negotiating parties. Second, the impact of not reaching an agreement for both parties needs to be understood – it alone creates negotiating leverage. Thirdly, there is the monopoly position unions enjoy when it comes to setting terms and conditions in particular environments.
Chris Gardner is a partner with Seyfarth Shaw, a workplace relations law firm.