The get out of building a jail free card

by | Jun 20, 2012 | Business

With the construction industry in such a parlous state, it is no mean task to make a contract stick – to get paid, that is – whether you are a sub-contractor or a state government. Creditors of the collapsed builders Reed Constructions, Kell & Rigby and St Hilliers are finding this out.

All three, incidentally, had variously failed to file their accounts on time over the years – an act which might have put their creditors in the picture a little earlier as to the state of their financial affairs.

In any case, two vital questions arise from the collapse of construction companies:

How are staff and creditors protected when the builder falls on hard times, transfers its assets and contracts to another entity and starts again under a new name?

Why should the taxpayer pay to complete a project – as is the case with Victoria’s Ararat Prison – when private sector operators blow up and fail to meet their obligations under their contracts?

Having made a killing two years ago from the federal government’s school-building program, Geoff Reed’s private building company called in the administrators Ferrier Hodgson last week.

Just days before going under, however, Reed Constructions Australia transferred a $90 million earthworks contract for the Gladstone LNG project in Queensland to another company within the Reed stable.

It seems there is no one to stop building companies from calling in voluntary administrators, transferring assets to another clean corporate entity and starting anew. Although it should be said that a construction contract is often an asset which requires a lot of work to be done and a lot of money spent before its value is realised.

The $400 million Ararat Prison PPP in Victoria collapsed last month when the joint venture vehicle run by St Hilliers and Hawkins Construction hit the wall.

The principal of St Hilliers, Tim Casey, in his remarks to a subsequent creditors meeting, described just how dire things were.

Construction companies were competing for jobs with little or no margin just to keep their workforce ticking over.

If anything went wrong – say bad weather or labour disruptions – the company lost money. And the weather has not been good this year.

Meanwhile, Casey’s joint venture partner at Ararat, New Zealand’s Hawkins Construction, has been shifting assets out of the guarantor company into six new companies, possibly to minimise its exposure to any guarantees it might have given on the prison project.

Searches of the New Zealand Companies Office for Hawkins Construction show that six new companies have been incorporated this year which begin with the words ”Hawkins Construction”. It is a wind-change indeed for a company which has operated under one name and in the same corporate guise since it was first established in 1946.

Meanwhile, the whole point of the PPP (public/private partnership) is for the government to offset its risk and costs of construction. If the private operator gains the rewards, it should also bear the risk, fully.

Yet the two major equity providers on the Ararat job, which had been contracted to complete the work for a fixed price, appear to have walked away. They may well argue that, on a narrow legal interpretation of the contract, they have performed their duties. Still, the Commonwealth Bank and Bilfinger Berger agreed to provide a jail, have not done so and have ceased to provide funding.

And now there is a Mexican stand-off where the state is stubbornly refusing to tip in further funding and the privates in their partnership have either been shot or are running for the hills.

The answer for future PPPs is to get the formula right so taxpayers are not exposed. And transparency is absolutely essential.

At this point, Victoria is refusing to ensure that the financial accounts of its partners are properly disclosed to the public.

In the case of Ararat, the state opted to run with second-tier builders, and they bit the dust.

It is simply not in the public interest for the state to be doing deals in secret with public money on the line. The public is taking both the costs and the risks of the project, whatever the outcome.

Last month the Victorian County Court project celebrated its 10-year anniversary. The project is halfway through its 20-year term and has been immensely profitable for the Liberty Group (a wholly-owned subsidiary of Challenger).

At the end of the project term the valuable law courts building on the corner of William and Lonsdale streets in Melbourne actually stays with the private operators, rather than reverting to the state.

This one is a deal to die for – they are not all that generous.

Yet with these kinds of prizes at stake in PPP transactions, the least the government can do is to ensure that their private partners properly take on the project risk.

Clarification: Hawkins Construction has not collapsed. Hawkins’ Aegis Correctional Partnership joint venture has entered into voluntary administration.

Hawkins has restructured (for reasons it has not stipulated) and established six new entities but has not transferred assets from the guarantor company as suggested in the article.


Michael West

Michael West

Michael West established to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences. You can follow Michael on Twitter @MichaelWestBiz.

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