Shakeout from Mainzeal failure could raise competition issues

The most important result of the collapse of Mainzeal Construction is likely to be closer scrutiny from the regulators.

The government is already concerned about the level of competition in the construction sector, with a high level of dominance by the top three firms: Fletcher Building, Hawkins Construction and Mainzeal (in order of size).

Fletcher Building, in particular, has been mentioned by ministers as a highly dominant player in the sector and the Productivity Commission last year, in a lengthy study of housing affordability, highlighted high prices as a factor pushing costs up.

Total construction costs rose by 30% in real terms in the nine years to 2011, with large increases recorded over the 2000s house price boom.

“The cost of residential construction in New Zealand is significantly higher than in Australia, with negative implications for housing affordability,” the report concluded.

For example, building costs per sqare metre are estimated to be around 15% to 25% lower in various Australian cities than they are in Auckland.

The Productivity Commission’s lengthy and comprehensive report did not recommend any action on competition issues, and noted the Commerce Commission had brought a number of actions – mostly unsuccessfully – against larger firms in the sector over the recent decade.

The government has, however, not ruled out making a closer examination of competition issues in the industry.

Asked at a briefing on housing affordability late last year if the government would be looking at Fletcher Building’s role in the sector, Finance Minister Bill English said it would be “difficult to look at competition in the industry without looking at Fletcher Building”.

At this stage any examination of competition issues has been ruled out until the second half of the year, but a move by Fletcher Building to snap up the remnants of Mainzeal would cause greater concern at a political and regulatory level.

Fletcher Building has not ruled out such a move and has indicated it has the capacity to take up Mainzeal’s existing contracts.