Australia’s mid-level contractors urge more focus

Mid-tier contractors step up for change

The surface construction contract for the recently opened Sydney Metro Northwest line was awarded to Italian companies Salini and Impregilo.

Australia’s mid-tier providers are banding together for more visibility in public procurement decisions. Rail Express reports.

WHAT DO THIESS, SEDGMAN, UGL, CPB Contractors, Abigroup and Baulderstone have in common? The first thing might be that they are all prominent contractors working in various industries in Australia, including construction, rail and mining. But look more closely and it becomes apparent that all six of these contractors are owned by just two companies, CIMIC Group and Lendlease Group, and only the latter is Australian-owned.

This is not uncommon corporate practice in itself. Many famous companies considered to be American are actually majority international-owned operations, such as Budweiser (Belgium), Burger King (Canada), 7-Eleven (Japan), General Electric (China) and Trader Joe’s (Germany).

But in the world of infrastructure development, where public procurement is much more prominent, healthy competition is more readily encouraged. Australia relies heavily on overseas companies to help deliver its infrastructure projects, and state governments vary in opinion when it comes to the importance of integrating local contractors into proceedings.

Victorian premier Daniel Andrews has been among the most vocal for change when he delivered the Victorian Local Jobs First Bill last year, establishing the role of a Local Jobs First Commissioner and set “local content requirements” for 88 strategic projects.

“No other jurisdiction in Australia sets mandatory targets in legislation – by doing so we’re at the forefront of industry participation – creating thousands of jobs for Victorians and supporting local businesses and industry,” said minister for industry and employment Ben Carroll following the announcement.

On the other hand, New South Wales’ transport minister Andrew Constance, who commissioned Spanish construction major Acciona for the Sydney Light Rail project (a decision that has led to a legal tussle with the company), has taken a different tack when it comes to project delivery.

Defending a 2016 Baird Government

decision to outsource the $2.3 billion construction of 65 Intercity trains to Hyundai-led consortium RailConnect NSW, Constance said that the decision would lead to a 25 per cent cost saving. This approach received criticism from the Australian Manufacturing Workers’ Union (AMWU) and others, who indicated that hundreds of local jobs would be lost as a result of the decision.

“The Victorian model requires a high percentage of local content and that is the only way to go, but in NSW we’re banging our heads against a government brick wall – they don’t care, don’t listen,” said Downer EDI delegate Shaun Goss in response to the decision.

A forum of Victorian and NSW industry and public sector leaders established the New Construction Industry Leadership Forum in response to these concerns as a way to improve

the value and effectiveness of government delivery and procurement of public infrastructure programs. The forum received the support of both the NSW and Victorian state governments, Infrastructure New South Wales (INSW) and the Australian Constructors Association (ACA). Lindsay Le Compte, executive director of the ACA, explained at the 2019 AFR National Infrastructure Summit at the Grand Hyatt, Melbourne on June 13 that re-examination of project risk profiles was necessary to see how they could be put into component parts to gain the benefit of local participation as well as the expertise brought by international companies. “I think what we’re seeing at the moment through the Construction Industry Leadership forum that the ACA has joined with is a sea change in relation to how government and industry work together to achieve positive

The tender shortlist for the next stage of Western Australia’s Metronet project includes two consortia comprising a mix of Australian and foreign-owned contractors.

outcomes for the community through these large projects,” he said.

Le Compte is not alone in this view. The Construction Intelligence Centre found that after Africa, Australasia was the continent with the highest concentration of foreign contractors delivering infrastructure projects.

Buoyed by this statistic, 12 Australian mid-tier civil, mining, construction and rail contractors — each with revenues in excess of $250 million — banded together to form Australian-owned Contractors (AOC), a group dedicated to returning balance to Australian infrastructure projects.

The group was created to bring attention to mid-tier Australian contractors to provide them a better opportunity to contribute to state

infrastructure projects being led by larger international conglomerates.

Georgiou Group chairman and AOC founding director John Georgiou referred to this as the “walls in the market” caused by a Government skewing excessively towards overseas contractors.

“If you take a billion dollar project, Georgiou won’t be able to stand up to try and qualify for that project — it’s just too hard for a whole bunch of reasons, so typically, what we would do is approach a Tier One or another organisation depending on its size, and pitch to a procurement consortium,” Georgiou explained.

“We’ve been able to position ourselves, albeit with no formal requirement, to have Australian companies in the mix and what we’re suggesting to government is that they formalise [the process] a little bit more.” The companies involved with AOC include contractors from a wide variety of industry backgrounds such as Bielby, BMD, Daracon, Decmil, Ertech, FKG Group, Georgiou, MACA, NRW Holdings, SRG Global, Wagners and Winslow.

Of these companies, the four most heavily involved in the rail sector are BMD, Daracon, Bielby, and Georgiou. “Australian-owned contractors have been ‘risked out’ of 80 per cent of the market,” the group said in a statement. “Contract risk apportionment has escalated on major public infrastructure projects to the point where only Tier One contractors (the majority of which are (or soon will be) foreign owned and/or controlled) have the balance sheet capacity to accept these sorts of risks.”

Georgiou, who spoke with Le Compte at the AFR National Infrastructure Summit, explained that the AOC came about through detailed analysis of federally funded, major (defined as having a worth over $500 million) transport and infrastructure projects.

“For us we expected the number to be high but not that high, so we looked at other data and said, ‘What happens in their respective foreign countries?’,” Georgiou said.

“The numbers over there were 70-75 per cent done by local companies. Our data focused around $500m plus [projects] and we said, ‘There’s something wrong with this data’.

“In some cases it’s because these big local Tier One companies have been purchased by overseas interests, which from our point of view is fine, but it’s more about how we shift that balance … and that’s really the narrative we’ve been supplying to the Federal Government.” The results of this research was in line with the findings of the Construction Intelligence Centre noting that roughly 85 per cent of major infrastructure contracts in Australia were being awarded to international Tier 1 contractors, and that once Australian property and infrastructure major Lendlease was removed from this equation, the figures jumped to 97 per cent.

This is in part because construction contractors that seem to be Australian on their face are actually subsidiaries of parent companies based in North America, Europe and Asia.

CPB Contractors, as previously mentioned, is a subsidiary of the CIMIC Group, which is 70 per cent owned by German company Hochtief, and in turn Hochtief is 66.5 per cent owned by Spanish company ACS Group. John Holland Group, meanwhile, which was formerly owned by CIMIC Group under its old name Leighton Holdings, was purchased by Chinese-state owned company China Communications Construction (CCC) in 2015 for $1.15 billion.

The AOC has suggested that for mid-tier contractors unable to compete for the biggest contracts, joint venture collaboration with foreign infrastructure companies enforced via mandate could present a compelling compromise.

“That’s the narrative we’ve supplied to the federal government, saying ‘Look, here we have this industry, and if you look at the past you’ve got big Australian Tier Ones — how did they get to be Tier Ones?’,” Georgiou added.

“If you go back to the ‘70s and ‘80s, there was a lot of federal funding and federal projects and these companies grew on the back of that.

“[There were also] joint venture opportunities with foreign companies back then but those opportunities don’t exist anymore for a bunch of reasons and so we provided that narrative to say what we’d do about it.

“For us, it’s about how we get that change.”