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Thursday, 3 December 2015
Page: 9862

Senator CAMERON (New South Wales) (16:18): On behalf of the Chair of the Economic References Committee, I present the report on insolvency in the Australian construction industry, together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the report be printed.

Senator CAMERON: I move:

That the Senate take note of the report.

This is a report that has arisen as a result of the huge number of insolvencies in the building and construction industry. The building and construction industry comprises about 10 per cent of gross domestic product and 10 per cent of employment. This industry represents 20 to 25 per cent of all insolvencies, and the insolvencies leave approximately $3 billion worth of insolvent debt each year. This insolvent debt has huge economic, huge productivity and, more importantly, huge social consequences for participants in the industry. Small businesses in the construction industry face a higher risk than any other industry of either becoming insolvent or becoming a victim of insolvency elsewhere in the contracting chain.

We were told that this is market forces at work. This is not market forces at work in the building and construction industry; it is market failures in the industry. The failures go to the structure of the commercial construction industry, with long subcontracting chains, serious imbalances of power in contractual relationships—and Mr Acting Deputy President Sterle, you would be aware of that problem in the transport industry as well—the unconscionable and oppressive commercial practices engaged in by companies in the industry and unlawful conduct, including criminal conduct, around phoenixing operations in the industry.

There is a culture in the industry of non-compliance with the Corporations Act. As one witness said, 'The culture of the industry is like that of a battlefield: subcontractors are mowed down and fresh bodies are poured into the gaps.' These subcontractors that are mowed down are the victims of oppressive conduct from some of the major contractors in the industry. New tradespeople with very little business acumen or experience are then brought into the industry, and they are exploited in the same manner.

It is a cut-throat industry which is characterised by widespread nonpayment of subcontractors for the work that they have done; zero and negative margin tendering; concentration of market power in the hands of dominant head contractors; and an almost complete lack of respect for the principle that anyone who performs work in accordance with their contract is entitled to be paid for that work. If you do the work, you should be paid. The structure of this industry means that that cannot be guaranteed for anyone in the industry. It is a huge problem that this industry faces.

As well as the catastrophic economic effects of the high rate of insolvency, the inquiry heard compelling evidence of the social effects, including family breakdowns, mental illness, homelessness and suicide attributable to the immense commercial and financial pressures being placed on small businesses in the industry. We had the son of a very successful contractor in Perth, Western Australia, who was not paid for the work that his company had done on a major project in Western Australia, and that successful businessman ended up committing suicide because of the pressures that were placed on him and his family arising from the culture that applies in the industry. There is a complete lack of respect for the principle that anyone who does the work should be paid. And the concentration of the market power in the hands of the dominant head contractors results in fear and intimidation in the industry. Contractors are fearful that, if they get offside with the major contractor, they will never get another job in the industry. This is an untenable position, and the committee looked at all of these issues in great detail.

The other concern is the illegal phoenix activity in the industry. As you are aware, phoenix activity is simply tendering for work at lower than the price that you should pay and ending up in a position where you go bankrupt, you do not pay your debts, you do not pay out your contractors that have done the work, the contractors end up carrying the cost and then that company 'phoenixes'—it comes from the ashes, sets up again and becomes a company that operates as if nothing had happened. They are immune from any serious activity by the regulators in the industry, because the regulators do not have the resources to deal with this issue. The committee heard that there is a culture developing in the industry in which some company directors consider compliance with the corporations law as optional, because the consequences of noncompliance are so mild and the likelihood that illegal conduct will be detected is so low.

Cash flow problems and uncertainty around contractual payments provide little incentive to invest in innovative construction methods, capital equipment and workforce skills. The construction industry consistently ranks in the three least innovative industries in the country. Latest ABS data indicates only one-third of all construction businesses could be classified as 'innovation active'. Less than 15 per cent of construction businesses have innovation in development. This is a tragic position. It means that productivity is reduced. It means that employment is down. It means that profitability goes down because the structure of the industry is such that the big end of town grabs all the cream and it is not shared. The benefits of being in the industry are not shared effectively through the industry. In fact, if you do the work, there is no guarantee that you will get paid. The committee came up with 44 recommendations to try and deal with this problem. This is not the first time this issue has been considered, either at state or federal level. Even the Cole royal commission looked at this issue and came up with some views in relation to what was happening in the industry on this issue.

Among the committee's 44 recommendations are three that seek to ensure that the principle of being paid for the work that you do is widely observed. The report recommends that, commencing in July 2016, the Commonwealth commence a two-year trial of project bank accounts, with the status of a trust, on at least 20 construction projects where the Commonwealth's funding contribution exceeds $10 million. The move toward a trust model to underpin security of payment in the construction industry attracted the almost unanimous support of submitters and witnesses who gave evidence to the inquiry. The committee agrees with this approach. Project bank accounts have a very strong potential to resolve virtually all the payment problems that are besetting the industry and minimise the great harm that the high level of insolvencies is inflicting on industry participants. The committee believes that the Commonwealth, as a major funder of construction projects around the country, has a responsibility to be a model industry participant and require the adoption of best practice payment practices on Commonwealth funded construction projects. It is absurd, in this day and age, that security-of-payment legislation is left at the state level and is inconsistent around the country. A contractor can work in one state one day and another state the next day, and the security-of-payment legislation is not the same, so they get ripped off unmercifully.

As I said earlier, phoenixing is the scourge of the construction industry. We believe that: section 117 of the Corporations Act needs to be amended to require that, at the time of making an application for registration of a company, directors provide a director identification number obtained from ASIC after satisfying ASIC of the director's identity; section 569AB of the Corporations Act needs to be amended and a parallel civil penalty contravention for phoenixing offences introduced; and section 569AB needs to be extended to all forms of administration, not just liquidation. This is an issue that has to be dealt with. This is causing not only economic devastation but social devastation. The government should act on the recommendations and protect workers who need to be paid. I seek leave to continue my remarks later.

Leave granted; debate adjourned.