Light rail costs shouldn’t weigh us down

Canberrans might disagree about whether light rail is the best public transport system for their city. However, we probably all agree we shouldn't spend more than we have to on a project already billed at $700 million. Industry consensus is that construction in Australia generally is approximately four times more expensive to build here than in comparable European countries (eg, Germany) – why is this so?

Why is it so much more expensive to build something in Australia?

One undoubted reason for higher construction costs is the (omni) presence of the CFMEU. The CFMEU attempts, and unfortunately often succeeds, to literally control the construction industry, both here in Canberra and across the country. They mainly wield this control through their anti-competitive pattern enterprise bargaining agreements. The Independent Contractors of Australia estimate that such anti-competitive activities inflate construction costs in this country at somewhere between 20 to 30 per cent. That's roughly a quarter. A quarter of $700 million is $175 million – that is public money far better spent on health or education – not going into some union's war chest.

And there's the rub – we know that the CFMEU, via UnionsACT, have been involved in the tender process for light rail. So, with execution of light rail contracts imminent, it's critical we address potential probity issues that may have inflated the price, before it's too late.

During the tender process, the existence of a Unions ACT / ACT Government memorandum of understanding "came to light", as it were. We now know that, late in the bidding process, tendering consortia were provided with copies of the MOU. A copy of the MOU was handed by Capital Metro to the final two bidders. One can only imagine their surprise at being made aware of such a powerful document late in the day.

The MOU demands that tenderers make an undertaking to supply a union with (among other things) access to employees and records – some of these MOU-required undertakings are in clear breach of Commonwealth funding laws, which could be problematic as there is a significant portion of Commonwealth money in the light rail job. To make that point bluntly – it's not unforeseeable that the Commonwealth could pull their share of the funding from the light rail project if it later transpires that the tender process breached the 2013 Commonwealth procurement code.


We should not be surprised that any Labor Government is close to the unions – Labor is, after all, the historical party of the unions and it owes the union movement a great deal.

We should all, however, be very worried and upset when unions are given a mandate to involve themselves in a commercial tender process. The inclusion of the MOU in the light rail tender suggests more is involved than mere compliance with employment laws, which is already certified via third-party audits under standard procurement procedures.

The terms of the MOU (in strength of language normally reserved for contracts rather than MOUs) go beyond consultation. They state that, where contractors fail to "undertake… [to] participate in negotiations to develop enterprise agreements" with unions like the CFMEU, the ACT Government "must decline to award … [their] tender proposal".

Under freedom of association laws, employers have a right to refuse union enterprise agreements or even commence negotiations. Discrimination against a contractor (e.g. a refusal to engage them) because they don't have a union agreement is unlawful. Yet the MOU explicitly aspires towards such discrimination.

On large privately funded construction projects, where stakes (and liquidated damages for union-coordinated delays) are high, such discrimination is not uncommon. So-called "top-tier" builders (which manage big jobs but subcontract physical works to specialist firms) routinely exclude contractors if they don't have CFMEU enterprise agreements, even though it inflates their costs. They can afford to, because they know other bidders will do the same thing. The extra costs are simply passed on to the community.

For evidence of this, go no further than Stephen Sasse, an ex-executive employee of CIMIC, which forms part of the Canberra Metro consortium nominated to build Canberra's light rail. As Sasse explains, "there's kind of a cartel kind of notion … between the union and [builders] restricting work to contractors with union agreements, which builders have a vested interest in because: if all contractors have exactly the same industrial relations agreements … not only do [they] know there's no competition, but by building those costs assumptions into … bids, [they] don't really care if the job goes for longer or is more expensive because every other competitor … is bidding off the same platform".

It's unclear what industrial relations arrangements CIMIC struck for the light rail project, but if whistleblowing ex-executives are anything to go by, exclusion of contractors that don't have CFMEU enterprise agreements is a live possibility. The inclusion of the MOU in the tender process only enhances that perception. After all, the MOU says government funding must be "sufficient" to cover the "costs associated with collective bargaining".

This means we'll pay more than we have to for the light rail.

Restricting tenders to contractors with pattern CFMEU agreements inflates costs in a variety of ways. Pay is high regardless of skill levels – labourers on the Majura Parkway were paid $1000 above-award. There are also payments to union-affiliated entities, including training organisations and charities, which provide surplus revenue to the CFMEU. More significantly, there are restrictive work practices, like fixed rostered days off which halt works (rather than staggered rosters which allow works to continue) and even a facility for the union to call compulsory two-hour paid meetings with all employees, every day.

However, the main cost-inflation comes from restricted competition. When builders discriminate in favour of contractors with union agreements, it forms a kind of cartel. Emerging small-to-medium-sized businesses (which can't afford union demands) are automatically excluded, along with the promise of innovation. Over time, larger, more established contractors (which can afford union demands) entrench market dominance. They simply pass on the costs of union demands to consumers, knowing they're protected from competition. It's not for no reason the ACCC is investigating price-fixing allegations in Canberra's construction industry.

As stated above, union-employer cartels in the commercial construction sector are thought to inflate costs by between 20 to 30 per cent. When the Victorian Government entered into an MOU mandating use of union-endorsed companies for the Commonwealth Games Village, it inflated costs by an estimated 25 to 30 per cent. The MOU was later abandoned.

The ACT government must delay execution of the light rail contracts until the impact of the MOU on the tender has been investigated. Canberra has managed without light rail until now. Let's wait a bit longer to ensure probity, both now and throughout the construction phase, when subcontracts will be let. It could save us a lot of money.

Cameron Spence is director of industrial relations at the Master Builders Association of the ACT.