Chandler: The socialisation of Australia’s construction industry is no place to go

The construction industry is normally fiercely in favour of low taxing governments, less red tape and anti-nanny state interventions. Yet here it is needing more interventions and publicly funded support.

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State governments are being confronted with growing public disquiet over non-compliant construction, defects, building failures and residential apartment owners being forced onto the street with little or no assistance.

Being seen to do something, or blaming other people, are currently the responses of politicians.

Last week, Victorian Premier Daniel Andrews called on the federal government to step in to help, to avoid shutdowns in a construction industry already buffeted by the nation’s property downturn.

Federal minister Karen Andrews has publicly blamed ministers in the various jurisdictions for the crisis, saying it is their responsibility to administer building regulations in their own states and territories.

I am with the federal minister on this. Hopefully Karen Andrews will stand her ground until a viable way forward is nutted out.

Unless the federal government and the states get serious about the root causes of the issues the industry now faces, the cost to the community both economically and socially will become even more uncontrollable.

Construction is part of a global industry and financial marketplace.

In my view there are two frontiers that now need to be navigated:

• What to do about the faulty buildings already in the system and their consequences. Let’s assume that this will include all new builds less than 10 years old at whatever date the governments in Australia can get insurers back in the tent – say 2022. The long tail of any fix to then could linger out to 2032. The cost risk is huge.
• What should the regulatory framework look like when all new builds started after 2022 are hopefully covered by more certain and accessible underwrites? These underwrites can only occur with the benefit of properly qualified and licensed designers, constructors and certifiers who are individually risk assessed, with that risk properly priced and their performances tracked by a future-fit digitally enabled regulatory platform, and an effective regulatory performance that is evident and accountable.

From that point compliance should go up and the cost of the systemic industry failure go down.

The current flow of conversations is directed towards having either the states or the Commonwealth pick up the pieces.

It is likely that these responses may differ from state to state as the current spate of reported building failures have yet to include WA, SA and Tasmania. It seems pointless to try and create a national plan to underwrite existing failures.

One can understand the pressure on the Victorian Premier, who stated that “The Feds should be involved, but we will not let anybody be uninsured – there are some steps we can take”.

As a former health minister, he said he knew the state could step in as an insurer of last resort, but that also it was likely that Canberra could step in.

“We won’t leave anybody stranded.”

This is stirring stuff, but in the end, someone has to pay. It’s a state problem.

The construction industry is normally fiercely disposed to low taxing governments, lower red tape and anti-nanny state interventions – at least on the surface.

Yet here it is now needing more interventions and publicly funded support.

In NSW the building minister has put out a discussion paper – Building Strong Foundations – on how the state is minded to proceed.

Capacity building is central to any endeavour

Mixed views have been expressed about the effectiveness of the measures it outlines. Its final shape should be determined by the quality of feedback received.

No doubt the state and federal building ministers will be inundated by submissions. For my part, capacity building in the industry is central to any endeavour.

All proponents of a better industry future point to the skills that will be needed and the qualifications required.

They all seem to be on the same page about the need for a diligent regulator to root out the unqualified and poor performers, to transition to a modern industry that’s customer-facing and accountable.

Hopefully the minister will be investigating the root cause of the problem and the consequential costs of systematising practices that mostly do not now get to see the light of day. They should also consider if the solutions will be real or illusionary.

Here are some issues worth considering.

1. Home Owner Warranty Insurance

The various forms of Home Owner Warranty Insurance are in effect a last resort for owners.

In NSW the cover is provided under the Home Building Compensation Fund (HBCF).

No-one appears happy. The insurance industry has deserted this program due to its unquantifiable costs and lack of effectiveness in driving down the incidence of poor quality construction work.

It is hard to see how the HBCF is performing financially, but industry observers report that the incidence of rising claims is partially amortised over future premiums.

HBCF could be judged as a socialisation of the cost of poor industry performance, with shortcomings picked up by the taxpayer.

Exposure seems to increase during downturns. It is a bad time for this concurrence.

2. The Commonwealth’s Fair Entitlement Guarantee Fund

The Commonwealth’s Fair Entitlement Guarantee Fund (FEG) provides for reasonable wage and benefits cover for workers affected by insolvency.

The construction industry has a higher incidence of insolvency than other sectors

The construction industry has a higher incidence of insolvency than other sectors. The 2018 Auditor’s report into FEG found average annual FEG assistance advanced, had risen from $87.4 million in 2009–10 to $223.6 million in the five years to 2014–15.

Recoveries of FEG amounts advanced through the insolvency process have been low.

Data shows that the recovery rate of FEG amounts advanced from 2009–10 to 2014–15 averaged around 11 per cent. The auditor could not attest to value for money.

3. The level of developer surety

In NSW, the government requires a 2 per cent developer surety to be lodged to cover defects during the first 3-years of a strata development.

Industry advocates question the adequacy of the bond and the operability of the scheme.

The scheme does not provide for strata owners to recover monies beyond the 2 per cent surety in the event of developer resistance or insolvency.

Some developers reportedly treat the scheme as a means of capping their liability and include the surety in the cost of the development, therefore adding to the cost of housing for purchasers and renters.

Taxpayers also contribute when investor operating or capital losses result.

4. The cost of replacing flammable cladding

State governments have started to take on and self-fund the cost of replacing flammable cladding.

The costs are shaping up to be huge. It’s claimed that recovery of these costs from the responsible parties will eventually occur.

Governments already quietly fund the cost of rectifying non-conforming work that has been claimed and paid for as compliant.

The costs involved are spread across the agencies involved.

It is unlikely that there is a central register of the costs for these works as they are passed on to taxpayers with little prospect of recovery.

The method and extent of refunding the costs of replacing non-compliant cladding across a large number of private residential buildings are yet to be determined.

Many argue this should also be publicly funded. Recovery risk would seem high.

5. Support for residents displaced by unsafe buildings

The NSW government has opened the door to emergency funding to help those displaced by unsafe buildings being identified and evacuated.

This is a reasonable public response. The justification again is that the cost will be recovered from the responsible parties.

But in most instances the responsible parties will no longer exist or will be unable to bear the cost.

This intervention could in the end become like the FEG scheme with similar recovery prospects.

The net costs of these schemes are mostly passed on to taxpayers. They are interventions that would become less necessary if the regulators of the industry were more effective.

How developers cut corners

Even well intended developers and contractors become attracted to cutting corners when the regulator takes their eye off the ball or is insufficiently resourced to do their job.

Cutting corners occurs in construction on many fronts. For example, when:

• work safety is not enforced and the costs of compensation are increasing; non-compliance with the various operations of contractor security of payment legislation occurs and assurances given by contractors to their clients that prior progress payments have been properly disbursed. When it hasn’t this adds to the overall cost of construction and has an awful flow-on impact, especially to taxpayers; the insolvent trading before administration creates costs that taxpayers pick up; a range of unpaid statutory taxes and creditor cost write-offs are impossible to recover.

Regulators taking a harder line here would be called out as anti-business by industry.

Insurers must be brought back into the tent

If the Victorian Premier elected to become the Professional Indemnity insurer of last resort it would be hard to imagine that this intervention could be cost-effective or provide the assurance value that a properly rated risk and cost cover by a substantial insurer would.

Insurers must be brought back into the tent. That will require the clarifications proposed by the Building Strong Foundations legislation in NSW to be fully enacted and for those mechanisms to be properly embedded into modernised designer, contractor and certifier terms of engagement.

This is not a time for nanny state solutions that expose taxpayers to unquantifiable risk and cost. This is not a time to underwrite the cost of bad practices.

All of these challenges make up the “wicked problem” that is today’s construction industry.

The two frontiers now facing governments are: what to do with the consequences of industry failure to this point, and what the outcomes of the current regulatory reviews should achieve.

There would be little value in advising on the changes for turning this around without a quantifiable business case to support their merits.

There would be less justification if the self-interests of the property and construction industry were calls for lower taxing, less red-tape and no nanny state interventions as a good government principle without quantifiable reform.

It is time to stop subsidising the bad performers.

Any set of reforms that simply turned a blind eye to the cost consequences of reforms amounts to a socialisation of Australia’s construction industry.

The industry has arrived at a once in a 50-year watershed. What it chooses to do now is likely to have a 50-year long tail.

Once the true costs of an industry’s poor performances became structurally embedded, they would be very hard to remove.

The implications of not achieving a systemic turnaround of construction industry performance and effectiveness will impact Australia’s competitiveness in all sectors that are dependent on a better-performing competent construction industry that is coming under increasing global competitive pressure, affecting the retention of existing jobs and the creation of new ones.

This is why we need new industry capability that is smarter, more customer-focused and assured.

The construction industry should be very careful about what it wishes for if it wants a viable future. Without insurance, and financial sector confidence, it won’t have one.

David Chandler OAM, is a construction industry practitioner and advisor, principal, CE Advisory david.chandler@constructionedge.com.au