Every so often, a Government agency says it wants to lift the bonnet on the construction sector in terms of its market structure, competition and practices but nothing comes of it. It seems that it is that time again. Is there any reason to think anything will be done this time? 

We think so. For a start, multiple Government agencies are looking into the same sector at the same time. It is easy to understand why. The political will is being driven by a string of nationally significant topics that will not go away: housing affordability (especially in Auckland), the growing rebuild budget for Christchurch now at $40 billion, and the slow burn of the costs of leaky buildings. 

Can Government, with the ultimate responsibility for how these issues are resolved, afford to leave the construction sector alone? It appears not. 

Consequently, principals might want to start looking at their procurement processes to ensure that they engage contractors that will not embarrass them if the contractors are put under scrutiny. For contractors, now is the time when being able to show that they have clean processes will not only reduce their risk profile, but may also provide them with a competitive advantage in terms of business reliability. There may be some time to put sensible measures in place as no agency is rushing in blindly.  Instead what is being seen is a cautiously advancing line with various Government agencies backing each other up.  

The first agency to make a move was probably the Commerce Commission. In 2011 it identified the non residential construction sector as having very low awareness of the Commerce Act. It then set itself a long term goal of raising awareness and compliance by rolling out education to that sector. The next agency to make a move was the Productivity Commission. It issued a report to Government in 2012 on housing affordability issues. As part of its package of recommendations it picked out a number of issues that should be looked at more closely. 

For example, it observed that the cost of building materials seemed to be 30 per cent higher in New Zealand than in Australia. This year there has been a change in tempo. The new super-ministry, MBIE, has picked up on the observations of the Productivity Commission and has commenced its own study that focuses specifically on whether there are problems with the residential construction sector (although in reality the inputs into that sector may apply equally to non residential construction). 

The Commerce Commission has noted concerns about activity in the aftermath of disasters in other jurisdictions.

Running through the discussion paper that introduces the market study there is an evident “structure, conduct, performance” theme. What this means is that instead of trying to investigate conduct by particular firms, it is looking at the overall market structure itself. Based on the situation it uncovers, it may then infer that there are features of the market that create risks. Having identified particular problematic features of the markets ,the next steps may be to mitigate against those with some form of regulatory intervention. Again, the cost of building materials seem to be something the study specifically points to in this regard.   

It is possible that MBIE’s step into this space follows in the wake of events taking place in the UK (as well as the previous steps in New Zealand). The UK has had a much more dramatic set of encounters with its construction sector than its New Zealand counterparts over the last couple of years. The OFT (the UK equivalent of the Commerce Commission) has already undertaken a study and concluded that there are problems in the ready mix concrete and aggregate markets. The concerns have now been picked up by the UK Competition Commission. The commission’s role is to consider matters referred to it by the OFT, and it is considering whether to impose structural remedies i.e. regulatory interventions or requiring divestments of parts of dominant businesses to other players.  

In New Zealand, the Commerce Commission also seems to have signaled that it is going to take things further this year. In its Statement of Intent for 2013-2016 it records that “detecting and deterring” in the context of the Christchurch rebuild will be a priority for it in the upcoming year. It has also noted concerns around how the aftermath of a disaster has been known in other jurisdictions to give rise to opportunities for collusion. While voluntary compliance is its long term goal it appears that it is now beginning to make its point more forcefully, with the investigation that it has recently announced into the timber industry in which Fletchers is cooperating. While voluntary compliance is its long term goal it appears that it is now beginning to make its point more forcefully, with the price fixing allegation that it has now opened.

Again by taking another step forward, the Commerce Commission may be taking notes from its sister agency in the UK. In March seven executives in the UK construction industry were arrested for cartel activity in relation to the supply of products to the building industry.  This issue is the second major investigation into the construction sector by the OFT. In an earlier investigation into cover pricing (a practice that involves at least one firm bidding but with no intention of winning the tender), over 103 companies were found guilty of bid rigging. 

Overall, it seems there is an escalation by Government agencies occurring.  It is not yet clear how long it will take before they fully move in, but over the next year or so it seems hard to see how the interest could ebb away with the underlying political issues, such as housing affordability, only heating up.  Therefore operators in this sector, either as a supplier or purchaser, will be well advised to put measures in place to prepare for further activity in this space.