SUBMISSION TO VICTORIAN COMPETITION AND EFFICIENCY COMMISSION INQUIRY INTO REGULATION OF THE HOUSING SECTOR AND RELATED ISSUES

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1 SUBMISSION TO VICTORIAN COMPETITION AND EFFICIENCY COMMISSION INQUIRY INTO REGULATION OF THE HOUSING SECTOR AND RELATED ISSUES INTRODUCTION The Air Conditioning and Mechanical Contractors Association of Victoria Ltd (AMCA) welcomes the opportunity to place this submission before the Commission. Our submission addresses two separate, but inextricably connected issues. SUMMARY AMCA and its members are of the opinion that there are a number of fundamental problems with the Certificate of Compliance system and the attendant insurance arrangements that are in place to support it. The system is administered by the Plumbing Industry Commission. The system as it applies in certain parts of the housing industry fails to deliver any material benefit to the consumer and at the same time is a significant and unnecessary impost on business operating costs. The association has raised these concerns with the Treasurer, the Hon John Brumby, and it was his suggestion that we should place these concerns before this inquiry. The issues that we address here are: 1) The requirement to have the extent of the insurance cover specified in the Ministerial Order; 2) cost of the insurance to business and then ultimately the consumer; and finally 3) the monopoly arrangement that presently operates in the market for access to the insurance cover. We shall deal with each of these matters. But before we do, a brief outline of the association and the role that its members in turn play in the constitution process is instructive.

2 AMCA PROFILE The Air Conditioning and Mechanical Contractors Association (AMCA), is a nationwide trade association established to represent and service its members in the air conditioning and mechanical services industry. It acts as the industry voice in dealing with governments at all levels, regulatory bodies, other construction industry groups and trade unions. AMCA is the peak industry body representing companies across Australia. Our members are responsible for approximately 85% of all air conditioning and mechanical services contracting work in the commercial construction sector. In addition, our members have undertaken much of the air conditioning and mechanical services work in medium density and high rise residential building. Our members also operate large air conditioning service companies. AMCA is the only industry/employer association that is exclusively dedicated to the air conditioning and mechanical services industry. Since its inception almost 50 years ago, AMCA s objectives have been to provide and protect the interests of the air conditioning and mechanical services industry, its members, and the public they serve. In doing so, our members maintain the highest ethical standards of advertising, pricing, installation and service. While competing in competitive markets, AMCA members share certain goals and aspirations designed to improve the quality of service provided to the public. For these reasons the association has endorsed a Code of Ethics.

3 AMCA membership consists of mechanical contracting companies which, in relation to the following ethics and practices, hereby declare their intent to: 1. Be cognizant of obligations to clients and to deliver cost effective quality systems and service indicative of industry best practice. 2. Engage competent highly trained specialist to evaluate the technical requirements of specifications and the technical merits of works and to deliver to the client, a project which is correctly engineered, completed on time, within budget and with minimization of life cycle costs. 3. Meet all contractual and legal obligations including compliance with relevant legislation, Australian Standards and Codes of Practice. This in particular includes those which apply to environmental and health and safety issues. 4. Implement and maintain correct business and management practices, together with adequate asset backing, to ensure financial accountability and financial stability. 5. Implement the appropriate standards of quality assurance. 6. Promote the best interests of the community and the environment by ensuring that clients are aware of the effect of new developments in technology, materials and systems. 7. Encourage education, training and advancement if employees including apprentices, tradesperson, engineers and administration staff to ensure a competent and multi skilled workforce within equal opportunity guidelines. 8. Honour requirements of confidentiality and to observe the highest standards of business principles so as to prevent deceptive, misleading or other improper conduct. 9. Follow and encourage the adoption of proper tendering practices in accordance with the relevant Australian Standards and Codes. 10. Liaise with Government authorities, clients, consultants and training institutions to provide ongoing review, research and development for the betterment of the industry. AMCA s principal mission is to provide a range of services to members on a cost efficient and collective basis, and to act in ways that are designed to improve and enhance the commercial climate in which members operate their businesses. In order to achieve its mission, AMCA provides an extensive range of key member services. Industrial relations policy advice, information, and representation. Occupational safety and health policy advice and information. Access to commercial credit ratings.

4 Training programs. Access to technical information. Up to date and statistical information on commercial trends in the industry. Contract and other related commercial information. Contractual information and legal assistance on contracts. AMCA is active in representing the industry in policy issues pursued by government and other industry bodies. AMCA is represented on a wide range of committees ranging from industrial relations matters, industry reform, and commercial matters. Air conditioning and mechanical services contractors are the largest employers of labour in the services sector of the construction industry. The specialist staff our members employ directly include: Engineers Refrigeration Mechanics Plumbers Administration staff Electricians Draftsmen Sheetmetal workers Commissioning Technicians Estimators Project Managers. The association also represents a range of sub contractors and suppliers on the industry. Typical of the range of technical expertise provided by AMCA member companies include: Acoustic design and fabrication Co-generation and thermal storage Environment control systems Energy performance efficiency Industrial design and ventilation Computer based control systems

5 Sheetmetal and steel fabrication General design and installation Clean room technology Energy management Fire protection systems Smoke clearance systems Pressure vessel technology Hydraulic steel fabrication Life cost planning analysis Air conditioning installation and management Medical and laboratory gases and installation. Air conditioning and mechanical services contribute between 10 to 20 per cent of the construction value of modern buildings. The industry has undergone a period of dramatic change over the past 10 to 15 years. The role and responsibility of mechanical services contractors has become increasingly important and complex as the design and installation of systems grows in sophistication. Specialist air conditioning and mechanical services contractors coordinate the functions of many other crucial elements in the design, installation, commissioning and maintenance phases. AMCA has affiliations with an extensive array of industry organizations both in Australia and overseas. We are members of the Air Conditioning Refrigeration and Building Services Exhibitions (ARBS) and the Refrigeration and Air Conditioning Council (RAC). Our international affiliation is with the International Alliance of Mechanical Contracting Associations. This alliance comprises representatives from the United States, England, Canada, and Australia. In summary, the key features of the association to note are: AMCA is a nation wide trade association. AMCA is the only employer and industry association that is dedicated solely to representing the interests of commercial and industrial air conditioning contractors and service providers.

6 Members of AMCA are responsible for 85% of the installation of all new air conditioning and mechanical services plant for the commercial and industrial sectors in Australia. Our members operate large service and maintenance operations. The association has full time offices in every state. AMCA maintains strong international alliances. AMCA conducts a comprehensive range of education programs for its members. COMPLIANCE AND INSURANCE The Certficate of Compliance regulatory system was introduced in 1997 by the passage of the Building (Amendment) Bill When introducing this Bill, the Minister explained its purpose as: to establish a single body to oversee the occupational and technical regulation of on-site plumbing in Victoria. He went on to say: the Bill focuses on water, sanitary and waste water plumbing, generally known as on-site plumbing. It covers plumbing works on the properties of water agencies consumers. ] Then further in the second reading speech, he outlined both the reasons behind and the operational elements of the Bill providing for: the establishment of a Plumbing Industry Board (later changed to a Commission) changes to categories of registration abolishing the inspection system and replacing it with a Certificate of Compliance system based on oversees examples supported by random audits, and establishing a requirement of licensed plumbers to carry insurance. On the insurance matter the Minister said: it is essential in the interests of consumers that participants in the system carry adequate insurance.

7 The first Ministerial Order prescribing the requirements of the insurance cover was issued in February In summary we emphasise the following points. The system was designed to address issues related to water, sanitary and waste water plumbing. There was no direct reference to air conditioning and mechanical services. The changes were motivated by domestic consumer protection considerations. Air conditioning and mechanical services was very much an after thought in the development of the system now in place. This submission will go on to point out the deficiencies in the system for commercial, industrial and high rise residential buildings. It is appropriate to note in passing that the Certificate of Compliance system and the supporting insurance arrangements have been grafted onto the service and program maintenance sector of our industry with even more problems that remain unaddressed. We assert that the high rise residential construction sector along with the commercial sector is different from the domestic residential sector in terms of the nature of its structure, engineering expertise of companies along with the way that the work is carried out. The people who actually complete the works are very unlikely to be the people who actually sign the Certificate of Compliance that is lodged. The work will most often be designed by a professional engineer (either a qualified in house engineer or a consulting engineer) or a registered draftsman. In response to the contract conditions, all contractors will carry contract works insurance and be responsible for a 12 months defects liability warranty period. The companies will carry professional indemnity insurance where they undertake design work. AMCA submits that the insurance required by the Plumbing Industry Commission is not comprehensive to the client, does not provide any real benefit to the client in addition to that which always has been provided by contract works and professional indemnity insurance.

8 The Ministerial Order requires that: a plumber must have insurance that indemnifies him or her for: (a) any liability to pay compensation for any loss or damage arising from defects in the plumbing work. The meaning of defects is spelt out in Clause 9 of the Ministerial Order. It states (Paragraph 1) defects in plumbing work include: (a) a failure to carry out work in a proper and workman like manner in accordance with any plans and specifications set out in the contract (b) a failure to use materials in the work that are good and suitable for the purpose in which they are used (c) the use of materials in the work that are not new (unless the contract permits the use of materials that are not new) (d) a failure to carry out work in accordance with and in compliance with all laws and legal requirements without limiting the generality of this paragraph the Building Act 1993 and any regulations made under that Act. In summary therefore, the insurance cover being provided to the client warrants the workmanship only. It is AMCA s submission that contract works insurance provides the necessary cover for all of these matters. The forgoing has argued that the Plumbing Industry Commission insurance does not in any practical way provide additional benefits or protection to the customer, as it only warrants the standard of workmanship and not the product. When introduced, this form of insurance was not widely available in other countries. We believe this to still be the case. Under the requirements of the Ministerial Order the policy must provide cover for six years after completion of the works.

9 The time period over which the policy cover must extend has been difficult for the insurance industry to assess and therefore price the risk. They have adopted a very cautious approach to their pricing policy, presumably to protect themselves from the worst possible circumstances prevailing. Research undertaken by the association through its members identifies the cost of this insurance at approximately $1,000 per one million dollars of turnover. This is a significant impost onto business that must be passed onto the client. On the basis of the claims experience of our members, we can see no justification for this high cost continuing. The final point that we wish to make in this submission is the lack of any real options available to large to medium sized companies to place their insurance with an insurance company of their choice. A significant change appear to have occurred in about March As we have endeavored to show, the requirements of the cover required by the Ministerial Order is complex. With possibly the greatest difficulty for the insurer to assess the long term exposure that it may be taking on. When this insurance was first required there were four insurers in the field who were prepared to write policies. For large and medium sized contracting companies the number of insurers had dramatically reduced. March 2004 seems to be a critical date for reasons that are not apparent to us. From that date QBE Insurance seems to be the only insurer who will write a policy to meet the requirements of the Ministerial Order for contacting companies who have more than 10 plumbers working on site. The freedom of choice for contractors is even further restricted because QBE Insurance will not deal with any insurance broker on this policy unless that come through the Master Plumbers Association Insurance broking arrangement. The extent to which a monopoly is operating in this area, it is likely to be artificially inflating the cost of premiums paid by our member companies. Advice provided to the association indicates that it would take many years to negotiate an insurance arrangement outside of Australia through international insurers. The reason

10 given for this is that they simply would not be prepared to take on the six year extended requirement without significant detailed information which really is not available. CONCLUSION Our submission has traced the history and development of the Certificate of Compliance system and the insurance arrangements it prescribes. The association submits the appropriate conclusion to reach is that the system was designed to address a perceived need in the domestic/residential sector. We do not question its relevance in that sector, however, when these arrangement and requirements extend outside of that sector and into air conditioning (especially medium density and high rise residential) we believe they are neither necessary nor appropriate. At least a review and more practical approach is needed in this sector, if not their abolition and a total change in approach. RECOMMENDATIONS The Certificate of Compliance system shall apply only to the domestic/residential sector (Class 1a buildings). A totally different arrangement should apply on other sectors. As there are far too many situations where the person who actually carries out the plumbing work is not the person to sign the Certificate of Compliance, there should be some form of company registration or licensing. There should be no double counting in terms of insurance cover. That is, if the current insurance requirement is to continue, the premium should be calculated on company turnover less equipment costs, as the equipment is adequately covered by the manufacturers warranty. There should be a choice of insurers in the market to provide the Plumbing Industry Commission insurance requirement in the event that the current system is retained.

11 Where installation work is covered by either professional indemnity and/or contract works insurance, it should be exempt from the Plumbing Industry Commission warranty insurance. If the current Certificate of Compliance Certificate is retained then for contract service and maintenance work, it needs to be significantly simplified.