IR: First the rule of law, now for stable contracts

James Paterson -- Australian Financial Review -- 18 September 2017

 Restoring the rule of law to our industrial relations system has been one of the signature achievements of the Turnbull government. Now is the time to build on that success with wider reforms to increase the efficiency and productivity of our workplace relations laws.The Coalition has successfully reinstituted the Australian Building and Construction Commission to help stamp out unlawful behaviour in the construction industry. We have established the Registered Organisations Commission to regulate the conduct of unions and employer associations and we have banned corrupting payments between employers and unions to ensure obvious conflicts of interest will no longer occur at the expense of workers.The government's early focus on rule of law issues makes sense. Lawless workplaces are not fair, safe, or productive.Having substantially completed this part of the IR reform agenda, the government can now take up the task of streamlining our overly rigid workplace relations laws and unlock the economic dividends from doing so.

Go for greenfields

One good place to start is greenfield agreements.Greenfield agreements are enterprise bargaining agreements (EBAs) for new projects, struck between unions and enterprises that have not yet hired any employees. Greenfield agreements now make up 10 per cent of all EBAs, two-thirds of which are in the construction industry.They often cover large, capital-intensive projects in both the public and private sector – projects that require a level of certainty in order to secure financing, manage risks, and avoid cost blowouts.Some enhancements to greenfield agreements have already been made. In 2015, the Coalition placed a three-month time limit on negotiations, so that unions could not hold employers to ransom indefinitely by refusing to agree to reasonable offers. If unresolved after three months, the employer can go to the Fair Work Commission (FWC) with a proposal. For approval, the FWC must be satisfied that the agreement matches the prevailing pay and conditions for equivalent work, within the relevant industry, in the same geographical area.This was an improvement, but the prevailing wage rule creates a slow ratcheting up of pay and conditions over time, regardless of the state of the industry or the particular circumstances of the enterprise in question.

Large cost pressures

This is a cost pressure the Australian economy can ill-afford. As the Menzies Research Centre has found, inefficient work practices and exorbitant wages on union-controlled sites already add between 20 and 35 per cent to the cost of major building projects in Australia.The power imbalance at the beginning of the greenfield negotiation process could be resolved by changing the prevailing wage requirement to a more reasonable standard. If no agreement is made after three months, the employer should be able to propose an agreement to the FWC with pay and conditions at the level of similar work performed by another business with an EBA.

The second major problem with greenfield agreements is that they only last for a maximum of four years – regardless of the size or duration of the project.Many projects take longer than four years to complete, particularly the large capital-intensive projects that often rely on greenfield agreements.This arbitrary limit forces employers to renegotiate EBAs at crucial stages of their projects' completion – times when delays can be financially devastating. This gives unions enormous bargaining power, enabling them to leverage employers who must meet contractual deadlines or suffer penalties. This risk is a significant turn-off for potential investors in large projects.Deals for life-of-project

This problem could be resolved by a simple, common sense reform: allow enterprises to make greenfield agreements that last the life of the project.This was the recommendation of the Productivity Commission in its 2015 inquiry.These are not radical reforms. But they will help attract large-scale investment, particularly in the construction and resource sectors. Projects that are currently marginal or non-viable may be able to go ahead thanks to the additional certainty provided.Crucially, they will also save taxpayers money.The Coalition has a plan for more than $75 billion in infrastructure investment over the next decade, including major projects like the $5.3 billion western Sydney airport, $8.4 billion inland rail, and $2 billion Snowy Hydro 2.0.Many of these projects will require greenfield agreements. Even small reductions in the cost of these infrastructure projects could save taxpayers billions.Having restored the rule of law to our IR system, we must now focus on improving the economic efficiency of our workplace relations laws. Greenfield agreements are a good place to start.

This article originally appeared in The Australian Financial Review.