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Economics References Committee
13/11/2015
Non-conforming building products

BURN, Dr Peter, Head, Influence and Policy, Australian Industry Group

THOMSON, Mr James, Senior Adviser, Standards and Regulation, Australian Industry Group

CHAIR: I welcome Dr Burn and Mr Thomson representing the Ai Group. Thank you for appearing before the committee today. I invite you to make a brief opening statement should you wish to do so.

Dr Burn : Thank you, Senator. Over the past decade or so there has been a clear increase in anecdotal reports about the use of non-conforming products in the building and construction industry. This is a concern because of the increased risks to safety and other costs associated with lower quality products. In addition producers that conform with relevant standards and regulations can be at a competitive disadvantage when the price at which the competing product is sold reflects lower levels of attention to the quality that is required under Australia's conformance framework.

The accumulation of reports of non-conforming products coincided with the rapid growth of new centres of global production, the period of the high Australian dollar and the greater penetration of imports into many local markets. In 2013 Ai Group published the groundbreaking report The quest for a level playing field: the non-conforming building products dilemma. The report found that there are gaps and weaknesses in the building products conformance framework resulting from confusion among stakeholders about the responsibilities of regulators; insufficient knowledge of the conformance framework; inadequate surveillance, audits, checks, testing, enforcement and first party certification; too much responsibility placed on building certifiers by the current conformance framework; inadequate clarity of their role; and an overemphasis placed on regulatory controls at the point of installation within the conformance framework. Survey findings presented in the report included these: that 92 per cent of 222 responded companies reported non-conforming product in their market sector. The extent of this penetration varied across the sectors surveyed; 45 per cent of respondents reported nonconforming product had adversely impacted on revenue margins and employment numbers; and 43 per cent of respondents had not lodged a complaint when encountering non-conforming products. Of these close to half indicated that they did not know who to complain to all how to lodge a complaint, or reported that complaints previously lodged did not achieve a result.

Ai Group believes that Australia has adequate standards and regulations, however the operation of the conformance framework that is comprised of all regulations, codes of practice, standards, certification and accreditation schemes, which bring about product conformance in this sector, has gaps and weaknesses. Lack of independent verification and insufficiently visible regulatory authority is making conformance framework ineffective and unfair. The end result is undermining confidence in the regulatory system and the safety, quality and competitor concerns mentioned above.

The recent Infinity cables recall showed the massive impact on the supply chain when a high-risk product enters the market that does not comply with relevant standards. The costs and safety aspects of this issue are yet to be fully played out. The Docklands fire in Melbourne raises questions about Australia's conformance framework that allowed a product to be installed that, on the evidence available, does not appear to comply with the National Construction Code. These well-publicised examples are only the tip of the iceberg of a problem that Ai Group believes wide ranging across the sector, and certainly our survey evidence suggests that.

Ai Group believe that Australian consumers and the community have the right to expect products that are safe and of suitable quality. We also believe that businesses who put in time, effort and expense to ensure that the products that they make and use conform with appropriate standards and comply with relevant regulatory provisions should not be placed at a competitive disadvantage in the market. We are also mindful of the need to keep red tape to the minimum necessary. To achieve these objectives we have put forward recommendations in a number of reports and submissions, including in our submission to this inquiry. I would like to draw particular attention to five of them which you have before you.

We should improve surveillance and audit activities on compliance with the National Construction Code. We should expedite the development of the intergovernmental agreement to underpin the electrical equipment safety system. High-risk building products should have a higher level of evidence of compliance in the National Construction Code. The feasibility of placing the responsibility for product conformance at point of sale should be evaluated. The feasibility of establishing a confidential reporting system to facilitate the reporting of non-conforming products should be assessed.

Ai Group recognises there is no silver bullet to the problem of non-conforming products. We believe it will take the cooperation of industry regulators and governments to develop a lasting solution. Just as an aside, to facilitate that process, we have played a leading role in creating the Construction Product Alliance to encourage wider buy-in and cooperation between industry regulators and government. The Construction Product Alliance brings together the private and public organisations working to promote awareness of non-conforming building products and identify opportunities for improved supply chain solutions. Thank you.

CHAIR: Thank you, Dr Burn.

Senator XENOPHON: Do you feel that you are banging your head against an arguably non-conforming wall on this? Looking at your recommendations, I commend the Ai Group for giving such clear, precise and concise recommendations. I have read the key parts of the 2013 report that you refer to. You are still not being listened to. We have the Housing Industry Association giving evidence today. They are frustrated. You have the CFMEU. They are deeply concerned about the impact on their members and on jobs. What has the response been to government to date? No-one seems to want to know about this. Everyone seems to want to shove this off to someone else. Is that a fair summary of the frustration here?

Dr Burn : I think, certainly, the report itself came about because of the frustration.

Senator XENOPHON: When did it come out—in what month?

Dr Burn : In November 2013—this time two years ago.

Senator XENOPHON: So it is two years old. Two years on, not much has happened.

Dr Burn : Maybe we have become immune, but there has been a certain amount of activity since. There are the intergovernmental developments. There is this inquiry, for example. There is certainly much more awareness and media focus on it. We have had much more attention at ministers' offices and the like. So, certainly, relative to the banging the head against the brick wall—

Senator XENOPHON: Which may or may not be conforming.

Dr Burn : The head or the brick wall?

Senator XENOPHON: Both.

Dr Burn : That was certainly how we felt when we did the report, and, relative to that, we have had a bit more buy-in since.

Senator XENOPHON: When you make representations to government and you have access to the highest levels of government, is this one of the key issues on your agenda?

Dr Burn : Frequently this is. Certainly when we are meeting with relevant state ministers and the industry minister at the federal level, yes, this is. When we talk with the relevant regulatory bodies, yes. But I do not think this one has gotten attention at the Chief Minister level, the Prime Minister level or the Premier level, and really only the specialist ministers would give you other than a blank look.

Senator XENOPHON: Without putting too fine a point on it, it seems to me that if someone dies, if there are fatalities, as a result of non-conforming or non-complying building products, that seems to grab everybody's attention. But the whole purpose of this inquiry is to avoid that happening in the first place.

Dr Burn : Yes.

Senator XENOPHON: You discuss confidential reporting in your submission and you note that the UK model for structural safety, CROSS—an appropriate acronym—has been successful in raising awareness of non-conforming products in the industry there. Tell us more about that. Do you think it would work here? How would it work in the Australian context?

Dr Burn : I should pass this one to James.

Mr Thomson : I will talk about that. In the Construction Product Alliance we looked at this and discussed this quite a bit. It is quite important to note that Engineers Australia has done a substantial amount of work on looking at what it would take to bring a system like that here to Australia. Engineers Australia is part of the Construction Product Alliance. It was certainly recognised that a system like this is needed because of the challenge with being able to put information on to the public record, and that is limited by the threat of legal action and confidentiality clauses in the construction industry.

So, in terms of 'would it work here?', there is one fundamental issue that really has brought this to a halt from our point of view—that is, the process of discovery when there is litigation. For this system to work it has to be confidential. People have to be confident that when they put a report in it is not going to be appearing in court proceedings or on The Sydney Morning Herald the next day. If they are not confident, they are not going to put anything in. So the work of Engineers Australia, which as I said was quite substantial, could not get around that fundamental problem. So, on one hand, yes, it would work well here in Australia—

Senator XENOPHON: It would involve changes to the rules of court in every state and territory and at a federal level and it would involve some legislative change. You would have to legislate for it. It would be quite messy, but you could do it, maybe.

Mr Thomson : It would take some will.

Senator XENOPHON: Yes, a lot of will. That is what the problem is. If there is litigation it would be used.

Mr Thomson : Your confidentiality is gone.

Senator XENOPHON: You can understand that. If you are a victim of a defective product and you have sustained loss and damage, you would want to find out if there had been other reports on that and whether there was an action as a result of that. That is the problem, isn't it?

Mr Thomson : Yes, well, when we were doing our report we came across circumstances where organisations had raised a red flag in relation to a non-conforming product that they had encountered, and then they found that there were ramifications for them through the supply chain. So they will not be raising those questions again.

Senator XENOPHON: I have two more quick questions. We heard from the Department of Immigration and Border Protection. Do you think they should play a greater role in the surveillance of importer products? What do you think the role of Border Force should be in relation to these products?

Dr Burn : I can have a go. But do you want to go first?

Mr Thomson : Okay. There are three points where regulatory control can take place—theoretically, that is. One is at point of installation, which is where it is at the moment with the National Construction Code. The other is at point of sale, as it is with a number of schemes, such as WELS and GEMS and others. The other theoretical point of regulatory control is at point of import. We have only conducted, I think, very preliminary investigations into the feasibility at point of import. But I think the perception that we have is that it would be quite an extensive scheme to put in place and it would be a question of resources. So our focus has been around—and you have seen our recommendations—point of sale.

Dr Burn : I do not have anything to add to that.

Senator XENOPHON: Finally, you may want to take this on notice. You made 12 I thought quite succinct, clear recommendations. What are your priorities for those 12 recommendations? In other words, what would be the top three, the top six and the top nine?

Dr Burn : We will take that one on notice.

Senator XENOPHON: In terms of what this committee does, that would be very useful.

Dr Burn : Rather than doing it off the top of our heads we will give that some thought.

Senator XENOPHON: If you want to consider what you think is practical, feasible and most important to do first.

Dr Burn : Very happy to do that.

Senator XENOPHON: Thank you, Chair.

CHAIR: Senator Madigan.

Senator MADIGAN: Thank you, Dr Burn, Dr Thomson. Amongst AIG's membership, are you aware of manufacturers who are members of your group whose product—intellectual property trademark—has been copied by overseas companies in the building products group, whether it is plumbing or electrical or whatever, and it has come on to the market and then people are misled as to what the product actually is? They assume it is the Australian-made brand because it is just about a complete copy. Are you aware of that amongst your membership?

Dr Burn : Yes, definitely. Counterfeit is essentially this one. That can also overlap with non-conforming. If it is a good imitation, it will conform. So the issue is more brand and return to IP.

Senator MADIGAN: Yes. Would you agree, Dr Burn, that this has an effect on the consumer, it has an effect on the manufacturer and it has an effect on the employees of that company?

Dr Burn : Yes.

Senator MADIGAN: For the benefit of the committee, are you able to identify—not companies that have been affected in this way—take on notice or give us some examples today of what sort of products have been copied or ripped off in this space?

Dr Burn : We can certainly take it on notice. Do you have any examples?

Mr Thomson : I do have one interesting example that I think is fairly well known. One of our members who make power points was suddenly seeing an increase in returns because they were faulty. They took a very close look at these power points and discovered they were not their power points. They were very good counterfeits. They then had the task of having to inform the customer, 'Sorry, it might say our brand name but it is not our brand'. That is one that immediately comes to mind.

Senator MADIGAN: As a result of non-conforming non-compliant products, ripped-off products—it is ripping off the consumer, it is ripping off the workers of these reputable manufacturers' companies in Australia. So we have three distinct lots of people who are being ripped off, through noncompliance by these rogue operators, so to speak?

Dr Burn : I think you are right. There are those three—

Senator MADIGAN: I am aware of members of your organisation, not just in the electrical space, who have come to me with these problems. It is a bigger problem than what the general public realises. Another side effect of all this is the critical mass and the viability of these companies who do the research and development, who produce a product to the relevant standard of safety et cetera. So it is also having an effect on people's jobs and the future viability of these companies, these reputable players in the market.

Dr Burn : Yes, you would think so. It might sound a bit abstract but I just want to distinguish between 'non-conforming' or 'non-complying' and 'counterfeit'. Some counterfeit product can be conforming—no problem. Similarly, a lot of non-conforming—indeed most non-conforming non-compliant product—is not counterfeit. So sometimes they overlap, but it is just worthwhile putting them in different buckets.

Senator MADIGAN: I suppose the point I am trying to make is that there are reputable companies that operate in this space. There are both Australian manufacturers and foreign manufacturers who are doing the right thing but are suffering. The consumer suffers, the workers suffer and the companies suffer. It is bad on all fronts, isn't it? It is a domino effect, so to speak, that we are talking about here.

Mr Thomson : Yes.

Dr Burn : Without a doubt that is correct. It is affecting and impacting the sustainability of members' businesses. One member during the course of this report pointed out to us that their margins are just getting so low that they have no ability to invest in innovation of new products. That becomes quite serious because what you are then looking at is a race to the bottom.

Senator MADIGAN: We heard in earlier evidence today an example given of Infinity cables. There is a direct effect. In Melbourne, for instance, the Australian manufacturer Olex produces a quality product to Australian standards—or Advance Cables for that matter in Dandenong. We are affecting people's lives as they are buying homes. People are being affected and potentially affected. And, as I said, we are affecting the workers, the companies—the viability. This whole issue has enormous knock-on effects, does it not?

Dr Burn : Yes

Senator MADIGAN: And the point you made, that there is product that is a take-off of other companies', which possibly is as good. But where it is not as good is that it damages people's jobs and it damages people's homes, does it not?

Dr Burn : Yes.

Senator MADIGAN: And it brings into disrepute the companies that they have copied off, when it is not up to standard.

Dr Burn : Even when it is as good it can still damage jobs. If it is supplied cheaper and there is no return to the people who are making the investment, those companies will have less to employ people with. So the quality impact and the jobs impact can go together, but they do arise out of different dimensions.

Mr Thomson : Could I just add, if I may, that it is important to make the point that it impacts both Australian manufacturers and Australian importers. They are both undermined by this.

Senator MADIGAN: We are talking about the reputable players that are impacted by this. We need to be proactive on this front. Currently there is one hell of a mishmash of people who are supposed to be doing things, but the holes in this you could drive a semi-trailer through. It is not that hard to avoid being detected or held to account as it currently stands, is it? If you are importing a dodgy building product into this country, the chances of getting caught or even of having to rectify the damage you have done is pretty negligible as it stands, is it not?

Mr Thomson : Certainly, that is a theme that came through when we were surveying members. The concept basically was, 'Where is the policeman? Where are the consequences?' If I could give an analogy, without wanting to oversimplify a complex issue: I drove down here from Newcastle yesterday and I went through four radar speed traps. I still have my licence, I might add. If you look at that, you have a standard, which is the 110 kilometre per hour sign; you have a surveillance mechanism, which is the radar unit; and you have an enforcement mechanism, which is the policeman. The action of those three means that I am not likely to speed. But if I can go from Newcastle to Canberra and there are no patrol cars, the temptation to speed is going to be there because I do not see any consequences. It is human nature we are talking about here. It is exactly the same situation. If unscrupulous operators believe that they can bring product into this country and that there are no consequences, then of course they will do it. Particularly, when you are in challenging economic times and when margins are thin, it becomes more likely.

Senator MADIGAN: Finally, we have no credible deterrents and no credible enforcement, as it stands. The two are tied together, are they not?

Dr Burn : Certainly, enforcement and conformance are tied closely. The more enforcement, the more people will comply. That is what you are saying, yes.

Senator MADIGAN: But there have to be credible deterrents as well.

Dr Burn : Yes, you are right.

Senator XENOPHON: Can I just ask a follow-up on this whole issue on deterrents and compliance. This problem has happened in terms of the inquiries that have been involved with medical devices—where you get a dodgy medical device that causes injury to people. There was the case of the PIP breast implants, as an example. The company involved goes into liquidation, they phoenix themselves, and the same people with a different name go on their merry way with no insurance—nothing. There seems to be a similar issue here. We heard evidence from Border Force that sometimes when they are investigating a consignment the companies involved disappear and they just leave the gear on the wharf and there is no-one accountable. Should there be a mandated insurance scheme for if something goes wrong? We are not talking about the issue of whether it is being used appropriately by people, but whether it fails basic safety tests as an inherently defective, not fit-for-purpose product. Is there an argument for requiring insurance for these imported products, or for products generally, which presumably would be easier for Australian manufacturers to comply with so that if there is an importer the importer needs to carry X million dollars of liability insurance if something goes wrong? At the moment, if something goes wrong those companies invariably will go into liquidation and there is no redress for consumers. It is left to the poor old builders, who do things in good faith, who have to pick up the pieces.

Dr Burn : Certainly insurance should be considered as part of the suite of measures undertaken to address the issue, but it is an interesting relationship that would need to be investigated. You do not really remove the need for strong deterrence and enforcement, because in a way you could see that you are spreading the cost over people who are not doing anything wrong and letting people who are doing stuff wrong off the hook, because you have it all covered from insurance. So unless you also do something very strong on deterrence and avoidance you are really shifting cost to the innocent. I am not saying that you should not be looking at insurance, but it would not remove the need for greater levels of deterrence and enforcement activity.

Senator XENOPHON: So you are saying that mandating insurance might provide an option? In other words, if you are an importer you would need to have some minimum requirements so that if something does go wrong with a product there is some backup for it?

Dr Burn : Yes. An importer who meticulously does the right thing is simply adding to their costs in order to cover for expenses that are really the fault of someone else. That is my concern with the solution. I am not saying we should not consider it, but I think that is one of the issues that would need to be addressed.

Senator XENOPHON: But wouldn't it mean that there would be greater due diligence in terms of the stuff that they bring into the country in the first place? They would be able to risk assess if it is a reliable supplier. If you are dealing with importing products from a world-renowned first-class building products company, wherever that may be—whether it is in China, Japan, Thailand or wherever—presumably they could assess that risk.

Dr Burn : We know of a lot of companies who put a lot of time and effort and make big investments in investigating where the best deal should come from. They have spent years and years in markets around the world working out where they can reliably get stuff, where are the authentic standards marks and authentication, certification, et cetera. So they are doing the right thing. They are bringing good steel in, they are supplying the local market really well. They are doing a fantastic job. They would then see higher costs and no change to their behaviour. They are already doing everything they need to be doing. But for the rogue people, insurance could well have an effect on their behaviour.

Senator XENOPHON: Thank you.

CHAIR: Dr Burn, could I get this straight. Since your very worthwhile report was issued in November 2013, would it be fair to say that the most significant activity you have seen from government in response to your report is the building ministers forum which took place on 31 July this year, and which has then led to a senior officials working group? Would you say that is the most significant development since your report was issued?

Dr Burn : I think it probably is the single most important.

CHAIR: So it has taken 18 months for this—

Dr Burn : It took 18 months to arrange the meeting after we did our report.

CHAIR: Eighteen months to have a meeting.

Dr Burn : An intergovernmental meeting. That's not too bad!

CHAIR: Governments should be meeting on a regular basis.

Dr Burn : Yes, it took 18 months.

CHAIR: I note that you say in your submission, at the time of writing your submission, that it is not clear what role industry will play in the working group that has come out of the forum. Has any further light been shed on that? Do you have a role?

Mr Thomson : The engagement is with the Construction Produce Alliance, which was formed by Ai Group to ensure that we had broad engagement right across industry. My understanding is that there has been two-way communication between our chair and that senior officials group which is looking at developing the strategy. So there has been industry involvement from that point of view.

CHAIR: How is that progressing?

Mr Thomson : I do not have that information at the moment. I know it is going forward; I know they are on a very tight time frame. One hopes that it is progressing fairly quickly.

Senator MADIGAN: For the benefit of the committee, Ai Group would have membership that would be both manufacturers and importers of product—would that be right?

Dr Burn : Definitely, yes.

Senator MADIGAN: It would be very difficult for Ai Group in this space, because you are representing both manufacturers and importers. Is that right?

Dr Burn : No. We do represent them, but—

Senator MADIGAN: How do you balance that?

Dr Burn : As a class, importers are doing the right thing. Certainly, our members are.

Senator MADIGAN: Some importers are.

Dr Burn : The tension between domestic producers and importers is not really confined to this. We have a membership which is very broad, and this is not the most difficult tension. We are used to dealing with a variety of interests within our membership. That is part of what we do; we manage that and we work within our membership to sort that out. In a policy sense, we work very much on a principled basis; we go for the right solution, and argue, 'Anyone want to oppose the right solution?' We do not get very many voices against that. We argue very much on a principled basis. That is a key strategy in containing the variety of interests within the membership.

Senator MADIGAN: It is more along the lines of clarity for the committee, that Ai Group represents both Australian manufacturers, and importers.

Dr Burn : James's point was that businesses who are potentially damaged by importing of non-conforming product are just as likely to be importers as they are to be domestic producers, because importers also go to considerable expense to ensure that they are bringing in good product, and they are being undercut. It is not importers versus domestic producers; it is people who are conforming versus people who are not.

Mr Thomson : If I could add to that, Senator, when we were doing this report, the message that clearly came through to us from domestic manufacturers and importers was, 'We want a level playing field to compete on.'

Senator MADIGAN: For the benefit of the committee, it would be right, wouldn't it, that we do have Australian manufacturers who do import some products complementary to their range into the country, where they do not have the economies of scale? They do a lot of work to make sure that complementary product does meet the standards, don't they?

Dr Burn : Yes. There are complementary products; there are inputs into their own processes. Very rarely would an Australian manufacturer be using totally domestically produced inputs, or supplying totally domestically produced stuff.

CHAIR: Finally, could I ask you something about the confidential reporting approach. You noted that that has led to greater awareness of non-conforming product in the industry in the UK, and has positively influenced change to improve safety in the UK construction industry. You also note that the Queensland Building and Construction Commission has established a process. This is something which state authorities can basically do now. What is required for this to occur? Perhaps you could tell us if you have any updates as to what is happening in Queensland.

Mr Thomson : It is a good question. I must say, it is a point that has been on our agenda to follow up, because we are very keen to find out what their experience is. We have been aware of and dialogued with a committee that has been operating in Queensland, led by the Master Builders, which has brought together regulators, manufacturers and builders to look at non-conforming product. That was one of the key things on their agenda. We are of the view that if Queensland can get some successes in that area then why can't other states do the same? But we do not know at this stage what their experience has been.

CHAIR: Briefly, what is involved in confidential reporting?

Mr Thomson : In the scheme in the UK, it is a relatively simple concept where individuals in the industry can put reports through to a confidential reporting line, either verbally or in writing, about issues that they are encountering on their site. That can be in relation to construction practices, but, more particularly, it is products—and I know the emphasis in that scheme is on structural steel. That information goes to a board, who look at it. The board collect these reports and, when they feel they have sufficient information to make a statement, they will publicise it. But they go to great pains, firstly, to disguise the site that is involved and, secondly, to maintain confidentiality. They will put out a report, possibly once a month or once every two months, alerting the entire industry to issues that they are seeing coming through, which puts the industry on notice—this is a problem; keep an eye out for it. It is allowing everyone to learn and understand and be aware of issues, and that is why we have been quite attracted to it.

CHAIR: What is the incentive for informants to come forward? How does that system work? Is it an email? How do people provide that information?

Mr Thomson : My understanding—and I can seek greater clarification—is that it can be done by phone or by a pro forma that is filled in and sent away. As to the incentive, people want to see the right thing being done. People generally in the industry want to see the right thing being done, so it is that greater good argument.

CHAIR: Thank you very much for your evidence today.