ComCom flushes plumbers, electricians out of building study

The Commerce Commission will try to avoid ‘pandora’s box’ by excluding plumbing and electrical from the scope of its investigation into the building sector next year.

In its preliminary issues paper for the 12-month study, the commission said the focus will be on the “building envelope”. That will extend to foundation, flooring, roof and structural and non-structural walls, including windows.

The paper notes that the inclusion of plumbing and electrical supplies “would add significantly to the scope of this study given the range of products this would include, coupled with the overlay of different regulatory systems.”

This means importers and manufacturers of concrete, plasterboard, insulation, steel roofing, metal and concrete come under the microscope of the competition regulator. 

Electrical component suppliers are fragmented, though plumbing is dominated by several large players, including Plumbing World and Metrix, owned by NZPM co-operative. Mico NZ, another major player, is owned by Fletcher Building.

The value of residential building work has been increasing over the past decade, rising from $5.5 billion in 2012 to $18.7b for the 12 months to June 2021, according to Stats NZ.

A 2018 report by Deloitte Access Economics estimates building materials are about a fifth of overall building costs, with land, labour, professional fees and infrastructure costs accounting for the remainder. 

In its initial paper, the commission said it will not “pre-suppose” there are competition issues in a sector that has a reputation for clipping the ticket and a ‘rebate’ driven culture.

Commission chair Anna Rawlings said under the terms of reference it will consider “any factors that may affect competition for the supply or acquisition of key building supplies used to build the major components of residential buildings.” 

Not-transparent

But the commission’s ‘blank canvas’ starting point for the study seems to conflict with the political intent of the investigation.

In providing his terms of reference to the commission, commerce and consumer affairs minister David Clark cited the “highly concentrated” nature of some markets in the supply chain as at the heart of the competition study.

Clark also noted pricing was “not transparent” and new entrants had difficulties entering a highly protected market.

Finance minister Grant Robertson was unequivocal in his view that the industry was overpriced, stating in a budgetary discussion that “New Zealand is paying too much for building supplies,” particularly when compared to the Australian market.

The commission said it will explore the impacts of businesses that operate at “several levels” in the supply chain as well as concentration in relevant markets.

It will also look closely at ‘arrangements’ such as rebates and loyalty schemes, and any conduct that suggests competitors may be “accommodating one another in a way that impacts competition between them”.

Another area of consideration, Rawlings said, was the “decision-making behaviours” of market participants who are involved in or influence purchasing decisions for key building supplies.

Regulatory disconnect

Building Industry Federation chief executive Julien Leys said the industry welcomed the inclusion of the regulatory environment into the study, which was an area of "huge cost" for the industry.

“Cost isn’t just about bringing in or manufacturing products. The certification system, which can take upwards of a year for any product, can add significant costs – so there is a clear structural disconnect with how the industry is regulated.”

Leys said logistics and supply challenges due to the pandemic had accounted for a 20% to 30% increase in costs, while labour “churn” in the industry had added another layer, with building firms having increased wages by about a fifth. 

A spokesperson for Fletcher Building told BusinessDesk the company had seen the preliminary report and will participate in the process “in line with government’s expectations”.

In a recent research note to its clients, investment house Jarden said it hadn’t shifted its fundamental view on Fletcher’s, despite its exposure to the sector study. 

It said while the study is unlikely to lead to any rational change in the industry, there’s always a “heightened risk” until reviews of this nature were completed.

Tex Edwards, spokesperson for public policy group MonopolyWatch, said it was clear there were a number of "abnormalities" in the sector, including its rebate culture and market concentration.

He said over the past three years MonopolyWatch had reviewed and analysed international best practice in social house assembly. 

"Our members and associates have travelled to and visited 32 international house building factories, comparing costs, assessing processes and observing the complex interplay between those processes."

He said the group looks forward to sharing its analysis in submissions and evidence that we present to the Commerce Commission and with those interested in higher-quality lower-cost residential buildings.