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Some thoughts on solving our construction sector woes

The Government has a crucial role in reform and revitalisation of the construction sector, according to an expert panel. And it’s not just about KiwiBuild.

A panel discussion hosted by law firm Bell Gully explored how the Government should use its procurement grunt to help with a shortage of housing and infrastructure, and with structural problems besetting the building industry.

The five-member panel encouraged the Government to introduce innovation in tendering, to harness its control of the education sector to level the playing field towards trade-based education and training, and to take a long-term pipeline view to smooth peaks and troughs that have seen capability and confidence ripped from the sector over the last few decades.

The panel consisted of senior figures from Fletcher Construction, PwC, global law firm Ashurst, and property developer Willis Bond, alongside Bell Gully.

New Zealand’s unprecedented population growth has accentuated existing problems in the construction sector, Willis Bond director Wayne Silver told the 70-strong audience.

“The industry is structured in a way to survive downturns, not booms.”

And it’s only going to get worse, said PwC executive director Lara Bennett, because net migration and the housing shortage means the boom is stronger after each bust, and the skills shortages more acute.

“The troughs might not be that different to how they have been in the past, but because of the increase in population, the peaks are bigger each time.”

Silver said one of the key areas the Government can help is in education and training.

While in other countries, Germany for example, taking a trade-based educational route or a university-based route are equally valued - and often equally demanding - in New Zealand we consider trades-based study a second-tier education path, Silver said.

Fletcher Construction’s national commercial manager Paul O’Brien agreed. “We need to look at getting away from the perception that taking a trade is a lesser achievement than becoming an accountant or a lawyer,” he said.

Procurement is another important area where the Government needs to be more proactive to prevent collapses and encourage innovation, according to the panel.

Central government controls an estimated 18 percent of construction industry contracts, but at the moment tends to take a short-term, lowest-cost approach.

A University of Otago-NZ Institute of Architects research report released on August 17 (the same day as regional development Minister Shane Jones announced the formation of a new independent infrastructure body) slated the Government for being fixated on driving down costs, delivering inadequate briefs with insufficient information about budgets and timelines, and changing the scope of projects during tendering.

The report also suggested there was a lack of transparency in government procurement processes, an absence of feedback to participants in tenders, and a “race to the bottom” in terms of fees.

Harvey Weaver, a partner at global law firm Ashurst, said the New South Wales government started an initiative to be more flexible in its tendering and contracting processes when the volume of projects coming to market in the infrastructure sector meant that companies started to be much more selective when deciding which projects to bid for.

Feedback from the industry suggested bidding on state-sector programmes was often expensive, time-consuming and uncertain, and companies were giving much more thought to these factors when faced with deciding which project to bid for and in which state, Weaver said.

A lack of competitive tenderers would mean prices were likely to go up. To mitigate this, New South Wales has taken a more innovative and flexible approach, he said. That includes streamlining bidding processes, introducing electronic tendering, cutting back on the number of plans companies had to submit, and providing much more upfront information to tenderers.

In conjunction with this, there has been a recognition that there needs to be greater transparency on the upcoming pipeline of work, to encourage longer-term commitment to bidding.

“When companies can bid for a tender that, even if not successful, will give them efficiencies and learning for other upcoming tenders, then it makes it more worthwhile gearing up for the tender and investing in resources they might need for the first and subsequent tenders,” Weaver said.

He noted that in some instances contracts now offer many more 'carrots' rather than 'sticks', focusing on areas such as positive cash flow and the ability to earn additional payments for certain key performance areas, instead of just relying on penalties for not meeting targets.

Lara Bennett said some governments around the world have started looking at how they can help take some of the risks out of construction contracts. This includes more innovative payment and incentive structures, so construction jobs are more likely to be successful - or less likely to fail.

There are also moves to get contractors involved at a much earlier stage in the design and tendering process, and paying them for any pre-work they do. This has the advantage of ironing out potential sticking points earlier rather than later.

She said a well-designed project should involve everyone making money.

“If you set a project up right, with sensible time frames, good cost structures, then you will get good outcomes. If you are cost-driven, the risks increase and everyone is trying to get rid of risk, pass it on to others. That’s not going to achieve good outcomes.”

Fletcher’s Paul O’Brien said the government should be looking at how to smooth the boom and bust cycles by formulating a long-term pipeline of work that companies could bid for. It had to recognise the industry is uncertain for participants.

“Even with a pipeline there is no certainty of work, just a certainty of possibility. Companies are still faced with bidding and missing out.”

Bell Gully partner Hugh Kettle agreed. He said it is critical that governments are prepared to commit to major projects beyond a three-year election cycle.  

He noted the current proposal to establish an independent infrastructure body to help address New Zealand’s infrastructure issues. This would be a real opportunity to make a step change in project and programme planning, enabling market entrants to make better-informed decisions, and lifting the overall quality of procurement approaches across a range of sectors and scales, said Kettle.

Wayne Silver pointed to the National government’s focus on roads of national significance, a policy direction which was largely abandoned by Labour in favour of light rail and other public transport projects.

“This kind of politically-based switch in infrastructure policy discourages private investment in human and physical capital,” Silver said.

Bell Gully’s Hugh Kettle said the problems had been similar with public-private partnership construction projects (PPPs). With the government pulling the pin on PPPs in certain asset classes for the time being, the market was faced with “equity and debt sloshing around, but not many builders, and very few projects”, he said.

“PPPs aren’t a political topic internationally. When done right, they are seen as an efficient financing structure to get things built."

“Procurement shouldn’t be ideological.” 

Bell Gully is a foundation partner of Newsroom 

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