Regulatory Systems (Commercial Matters) Amendment Bill

Well, here we come to this part of the bill. The reason why we are all standing here tonight debating the Committee stage of this bill, so that it can get passed, is that Part 4 of this bill contains clauses—I think clauses 138 and 139, if I am correct—that put in place the system for the retention framework for moneys to be put in place by lead contractors when a big construction is under way, so that there is protection for the contractors who sit behind the lead contractor and for the subcontractors if that lead contractor goes bust.

If we could cast our minds back to, I think it was, Waitangi Day 2013, when Mainzeal—and I am sure that name is etched in our brains—began that collapse that had such a huge impact on the construction industry in our country. I think, off the top of my head, it was around $161 million or $163 million owing that that collapse resulted in. We are not just talking about theoretical figures here; we are talking about contractors who were locked out, with their tools inside, following that collapse, who lost their livelihoods, who lost their tools of trade because they could not get in to retrieve them.

As someone who has sat on the Commerce Committee, I think, for pretty much the longest time in the last 8 and a bit years, I remember submitters coming before the select committee in 2014-15 on the Construction Contracts Amendment Bill, which is now an Act, who talked in real terms about the cost of those collapses to them and to their livelihoods. Let us hope that we all remember who one of the directors of that Mainzeal company was, and that was Jenny Shipley. There has been an inquiry into that collapse, which has gone on and on, and as a result we had the Construction Contracts Amendment Act passed in 2015. Now we have before us today, in this debate in the Committee, in this bill, at clause 138, the process through which the moneys in a retention scheme can be collected.

Thank you, officials, for the work that you did on this. It was very thorough. There were several submissions on this, and they were very passionate submissions, can I say. They were submissions from the Registered Master Builders Federation of New Zealand and Contractors New Zealand, or whatever they are called—

💬 Phil Twyford: Civil Contractors.

—Civil Contractors New Zealand Inc.—who very passionately argued that the proposal in the bill was good and could we please get on with it, but their concern was that it may disadvantage the industry and they may have to come up for extra money once this scheme is actually enacted. So the bill that came back to the House actually has two methods of collecting that retention money, protecting that retention money—so it provides more flexibility—in ways other than holding cash.

I am hoping to take a call again in this debate, because this is such an important part of this bill. It is why we have to pass this bill this week, in order for this clause to come into effect.

I just want to follow on from my colleague Clare Curran, talking about, in Part 4, the provisions in this bill around retentions. There are two main things that the bill does in relation to retentions. The first is about the timing of the retentions, and the bill clarifies that the new provisions inserted by the Construction Contracts Amendment Act that would require retentions to be held in trust for those for whom the money is being held would not apply to contracts that were in place prior to 31 March of this year. That is the timing issue that Clare Curran was referring to.

The other main provision, really, is clarification, or perhaps an expansion, of the definition of the financial instruments that can be used to meet the terms of the retentions requirements. The wording in the Construction Contracts Amendment Act talks about cash and cash equivalents, and what this bill does is it makes it clear that other insurance instruments and other bonds and other financial instruments can be used.

To kind of understand the importance of this, it is really critical, I think, for people to realise that the nature of the construction industry in New Zealand is this one of cascading contracting relationships and the devolution of risk down the food chain. The problem with that is that the poor subcontractor at the bottom of the chain copped far too much of the risk, and certainly that was the case with the loss of retentions when a company went belly up. Clare Curran referred to the Mainzeal case, but there are many in the recent history of the construction industry.

Probably the largest one most recently was Stonewood Homes, which left a lot of subcontractors affected. So, basically, what the Construction Contracts Amendment Act requires is that retention monies withheld under these contracts are to be held in trust and that that obligation applies only to contracts entered into or renewed on or after 31 March. I remember the debate we had in the House here about the Construction Contracts Amendment Bill. It is a shame that Clayton Cosgrove is not here, because, actually, he is the member of this House who was really responsible for the retentions policy—for these provisions being inserted into the legislation after the Mainzeal crash. The other thing is that that obligation will protect the retention money for the benefit of contractors and subcontractors rather than allow it to be used as working capital.

The submissions that were made to the select committee on the nature of the assets—basically, the original policy intention was that liquid assets would give payers the flexibility to protect retention money in ways other than in holding cash, but a conservative interpretation of the terminology meant that, essentially, it was cash and cash equivalents only. Quite a few different industry stakeholders came forward, including contractors and subcontractors, banks and accounting firms and legal firms, and said that we needed a more expansive definition and that without that many of the firms would in fact have to borrow money and hold significant amounts of cash in order to meet the requirements for this, and that would add cost to their businesses and generally be an impost on the efficiency of those firms. That would obviously be expensive and it would kind of add cost to construction projects and, ultimately, be a cost to the customer.

So, yes, those are the main things. We support these provisions. We have been big supporters of the retentions policy, and these two things will tidy up two loose ends.

Before I give the member the call, I just want to pause for a little bit of in-service training. The Committee stage of a bill is where members refer to submissions that were made before the select committee and draw out questions for the Minister in the chair, stating the case that submitters have made and adding to this Committee stage. That is what this is about. The speeches that we have had so far are second and third reading speeches in many ways. They are telling the public, or maybe telling the Committee, what the bill does, what it might do, and applying various scenarios and anecdotes as to how that might be effected. That has got nothing to do with the Committee stage.

The last speaker had 120 seconds left before he was able to tell us about a submission, and the previous one had 47 seconds left before she was able to refer to any submission before the select committee. The Committee stage is about relating submissions that were made to the select committee and the points that were raised in respect of that and how they apply to the clause under debate, or asking the Minister specific questions. I look forward to that from Mr Kris Faafoi.

Thank you for your guidance, Mr Chair, on the Committee stage of this debate. I do want to speak specifically to clause 138 and the new subsection that is inserted by the select committee. We have heard the benefits of what has been transacted in Part 4 in terms of retentions, but I do want to point specifically to the date that is in new subsection (3), inserted by clause 138, which is 31 March 2017. The context is that the House sent this bill to the Commerce Committee with the usual 6-month period for the select committee to have its deliberations, hear submissions—I understand the bill was presented on 18 October 2016. Six months from that date would have taken us to mid-April 2017, so that would be in about a month’s time.

The issue I have with that is the process where a select committee would have had to report back to this House after the legislation was actually required to be enacted. So the situation that the Commerce Committee was put in was that we had a report-back date of mid-April, and these changes needed to be in force by 31 March. Now, anyone at home who is doing the maths knows that is simply not going to work. A submission made to us by the officials—and I acknowledge them in the Chamber today—was that that time frame did not and could not work for what was expected from the industry. So, in what I thought was a pretty poor and slack piece of planning and parliamentary process, we as a select committee—and I acknowledge that I came quite late to the select committee process during this piece of legislation—were asked to truncate our select committee report period.

Instead of the 6 months, we were given, essentially, 5 months and 2 weeks. That might not excite too many people at home, but I think that in terms of parliamentary process, when a Minister sends a bill to a select committee, if they want to truncate that select committee process period, they have to seek leave of this House, and it is a debatable motion. We can stand up in this House and say: “Well, we do not think that truncating that very important public scrutiny period under a select committee is warranted in this instance.” It is a process issue, but the Minister who presented the bill at the time could have said: “Look, we need this in by 31 March; technically, 6 months is going to take us beyond that. If you guys haven’t got a massive problem with it—it’s only 2 weeks—then we can live with that as long as you can.” But that did not happen.

I think we got to the silly stage where I think that—and I do not want to get the officials into any trouble—officials were being blamed for the fact that this had to happen faster than what was prescribed by normal parliamentary practice. So I would like to ask the Minister in the chair, Jonathan Coleman: how did this happen? Because it is pretty poor planning, I think, when you have a piece of legislation that is pretty critical to be passed, enacted, and ready to go on 31 March, and the report-back date says 2 or 3 weeks after that. It is not very good at all. Someone obviously does not have a calendar or is not planning things correctly when you get to the stage where, in the very process that is meant to be 6 months, you get the select committee being asked to truncate the process altogether.

I think, to put it mildly and diplomatically, I put up a case that it was poor practice, and I think that most members of the Commerce Committee agreed that it was not ideal. I do not think that select committees should be put in that position—after the fact, to be told “Well, we need this back by a certain date, so whatever you’re doing, you have to shorten the process.” and be given, essentially, less time for consideration and submissions on a bill, to make sure that something is passed.

We have no problem with what is being suggested in Part 4. I think it is pretty common sense. I think it is probably well overdue, but, in terms of what the deadline is for Part 4 in terms of the construction industry, which is ready and waiting for this to be passed, the parliamentary process was poor. I think the select committee was put under pressure to come back earlier than it was asked to, and if the Minister in the chair or someone responsible for the bill can explain as to why that would happen, I think we deserve an answer.

I call James Wood.

💬 Hon Member: Michael Wood.

The CHAIRPERSON (Hon Chester Borrows): Michael Wood—sorry.

I am seized by the quality and value of some of the submissions that are before us, and I would like to take a moment to speak to some of those. There are a large—well, not a large number, but a number of significant submissions on this bill. The ones that I want to focus on, in particular, are the submissions that were given by Civil Contractors New Zealand, the New Zealand Building Industry Federation, and the Registered Master Builders Association of New Zealand, and these relate particularly to clauses 138 through 144, dealing primarily with the use of retention money.

We have heard previously from colleagues about the importance of getting this area right due to the structure of the construction industry in our country, in which we have contractors and subcontractors taking on a potentially significant amount of risk in respect of this issue. We have made legislative progress, and this is a tidying-up of the previous legislative progress we have made in this area.

There are two quite important points that have been raised by submitters in respect of this section that I do not think have been satisfactorily answered so far, and I would like to get some clarification on them from the Minister in the chair, Jonathan Coleman. Firstly, there is the question of de minimis. There is, I think, consensus around the House about the direction that we are taking here in respect of retention payments, about having a system where we have a trust obligation apply to ensure that there is not undue risk falling on contractors and subcontractors—and, actually, let us not forget the workers who often work under those contractors and subcontractors, whose livelihoods are at risk.

But the question of de minimis has, correctly, been raised by the submitters, and that is, effectively: is there a threshold below which it starts to become a little bit silly? Obviously, if we are talking about large amounts of money between contractors and subcontractors, I think everyone in this House would want to make sure that there is a degree of security in place through the use of holding that retention payment in trust so that we know that it is going to go to the people to whom it is owed at the end of the job, once defects, liabilities, and other things have been completed. But if we are talking about, I do not know, a $500 payment, perhaps between a contractor and a subcontractor who maybe have a good and long-standing relationship, are we actually, potentially, creating a little bit too much bureaucracy and, actually, to some extent, defeating some of the stated purposes of this bill—if we go back to talking about the effectiveness and the efficiency of the regulatory system?

Of course, that is the kind of balance we are always trying to strike in these kinds of bills. We want public-good regulation to ensure that people are looked after, but we do not want it to become overly onerous. So the question of de minimis goes straight to that. If it is a small amount of money, are we potentially overcooking it a little bit by not having a de minimis requirement here? The feedback that has come back is: “No, we do not need to have that.” It would just be good to hear from the Minister what sort of analysis has been done about, potentially, other regimes where there may be a de minimis requirement in place and whether there might be some value in looking at that to make sure that the system is as efficient as possible.

The other point I want to touch on, which came up in the submissions, is the question—let me just find my notes here—of money, effectively, coming down the chain; money that is coming down the chain, potentially, from a contractor down to subcontractors, and this chain can be several deep. The question raised in the submission was whether that retention money can potentially be counted on as money that can then be paid on down to the next subcontractor further down the train. The reason I ask this question is that the departmental advice that came back struck me as rather vague—it said: “Well, no, not as a general rule.” That is the advice that has come back, and it advised submitters to seek legal advice. Well, this is a process of making the law; that is what this House does. My question to the Minister, really, is: is that good enough advice, and should it not be the case that, through the process that we are going through now, we can give to the sector some greater clarity about that question?

I do not necessarily have a firm view on that question. It may be that you say that, actually, that does not meet the requirements of money held in trust for it to be passed from one contractor down to a subcontractor, and so on. But it is a question that has been asked, and it seems to me that the response that has been given does not provide the clarity that we should expect. It will be good to hear from the Minister on that point.

Thank you, Mr Chairman—I am focusing on the right part of the bill this time. I appreciate that the Government is attempting here, of course, to put in place something that is very sound in policy—that is, that there should be some ultimate payment for sign-off, I guess, when a contract is complete. One of the things that I struggle to see in here, of course, is the threshold at which that sign-off should occur.

One of the still unresolved issues across the whole of the building industry is that of quality. In fact, I had a meeting this afternoon, actually, with the Plumbers, Gasfitters and Drainlayers Board and a representative from the electricians, and from the builders themselves, saying that the regimes they have—and the plumbers themselves are getting, I think, to a good space. But, with electricians and builders, they are not yet in a space where they can guarantee that a house or an apartment or whatever, when finished, is actually up to standard—for a whole lot of reasons.

In spite of the best attempts, I guess, by councils—the territorial local authorities—and industry scrutinising themselves, the fact is that we do not have legislation that backs that up to the point where we can guarantee that when this withheld payment—the retention—gets paid over, on completion of the contracts, that actually all of the parties will be satisfied. So I support the retentions provision in this bill, but if we think that is going to solve a lot of issues, we are kidding ourselves.

I think there will ultimately be debates that arise from—well, the work might have been done but to what standard? And if it lasts for 1 year, is that sufficient for a complete job? Or, indeed, as some are saying, a 10-year work guarantee on a property—and it should be that. In fact, it should be 20 years. If you went to Europe, it would be a 30-year guarantee on the quality of workmanship—and the fact that when the contracts are completed between the parties, then everyone has done what they are contracted to do and have done it to the standard that protects, ultimately, the person who is purchasing the property or paying the money for it.

So I cannot see anything in here that clarifies the threshold beyond which the parties will have to reach—that is, doing the work is OK, but you have to do the work to a certain standard, and at that time the retention money will be paid over, as it should be for a job well done. So I acknowledge—and I think one of my colleagues acknowledged—the Hon Clayton Cosgrove for his work in bringing this in. I think it has been an innovative policy, but ensuring that the money is not taken—and, with all the best intentions of Parliament, there are too many examples of where good ideas end up with money being rorted or with people running away with what is other people’s money, in effect.

So I say that this provision is a good one in principle, but the unresolved issue is the one of what quality of work should be required before the final sign-off on any project occurs. Is it from the person paying for the house, or is it the company that is contracted to build the house, for example, or is it one of the sub-contractors to one of their subbies? There are a whole lot of layers in the building industry. As was pointed out to me this afternoon, they all operate with different levels of accountability and scrutiny, and some of them are not very good, I have to say. I think it is something that the Government, and I am sure the next Labour Government after September, will look into—

💬 Hon Amy Adams: 2023.

—because it is urgently needed. Unlike the Minister over there, we believe that people buying houses should know that they are getting what they have paid for. The deregulation under the National Government in the 1990s has seen the leaky homes catastrophe—there is no other word for it—where tens of thousands of New Zealanders lost billions of dollars in assets that they purchased. They are worth considerably less because they are, simply, not up to standard. And we have to, in Opposition, ensure that every piece of legislation related to this improves the situation and does not simply exacerbate it.

In our enthusiasm to pass this legislation through and facilitate this, we cannot be naive enough to believe that by changing contract law and the retentions—and, I guess, amending the Construction Contracts Act 2002—we are now going to be all sorted. There are many, many things to be done, and I seek from the Minister and other members over there some assurance that they will look at that issue of threshold and quality. I know there are only a few more months left of their tenure, but it would be something to offer the people of New Zealand as they go to the election, because they have not done anything. We know of situations in Auckland, in particular, where substandard building is occurring every single day, with little or no scrutiny.

So although we have sorted out, or we are sorting out, the method of final payment—it is right that someone should withhold payment until the completion of a job, and it is right that when it is completed to a standard, that payment should be made and the money should not go missing. That is what we are doing here. But, ultimately, the threshold has not been clarified in law, and in the areas of plumbing and gasfitting, and the provision of electricity through a house—and we have now got, of course, issues of IT and fibre-optic and very, very technical issues around housing—there will need to be standards set there so the people who pay substantial amounts of money in the belief they are getting a good system simply do not get ripped off. I say that we support the progress of this bill, but there is still a long way to go in the area of housing for New Zealanders.

I will just take another short call on Part 4 of this bill. Before I start, can I just clarify and correct a comment I made in my earlier contribution, which was that the money owed from the Mainzeal collapse was around $161 million to $163 million—it was in fact $153 million. It is important to get that right. I have also taken on board the Chair’s comments around the questions that need to be asked and the reference to submissions.

Can I pose a question to the Minister in the chair, Jonathan Coleman, around the definition of “liquid assets” and what his analysis is of the quantum of liquid assets that—because I note, and I am referring here to the submission from Civil Contractors New Zealand, where it said that “The current requirements mean that a very significant amount of liquid assets ($250 million according to the 2014 MBIE Regulatory Impact Statement or a minimum of $600 million according to recent industry estimates) will be required to be held by clients and contractors when the new regime takes effect on 31 March 2017.”

I think it would be helpful for the Committee of the whole House if the Minister was able to use his vast knowledge of this particular issue and actually provide some clarity to the Committee around what sort of quantum we are talking about, because there is a big difference between $250 million and $600 million. I think that is probably quite important. So I am asking the Minister whether he can actually address that question before we end this part in the Committee. I do think it is also important, because we have touched on many things in this part of the bill—and thanks to my colleague Kris Faafoi, who spelt out the difficulties that the Commerce Committee had in trying to grapple with the process part of it.

It is really important to note that the 31 March date—which is next Friday; it is not this Friday but next Friday—which is so important, and which is why we must pass all of these bills this week, is not retrospective. The new regime around retentions, which relates to the Act passed last year that amended the Construction Contracts Act—that retention process that has been put in place, where retention moneys have to be kept in trust or through using that other instrument, can apply only from 31 March 2017. When we were before the select committee, we heard from the likes of Civil Contractors New Zealand, which virtually begged us to get this legislation through as quickly as possible so that we would have these protections in place.

We are supporting this, but I think it is important, too, for the Committee to hear how this process played out, why it played out, and what the cost has been to New Zealand and to the construction industry around this, and why it is so important that we get a retention process in place that actually works. I am concerned. Having read through this again tonight, I have been thinking: “OK, so how are we going to measure that it’s working? Is it by the fact that there are fewer collapses?”. What kind of monitoring or involvement is actually going to be had with the industry to ensure that these mechanisms for the retention of moneys are actually being effective, and that is through the trust process and through the other instruments such as conversion to bonds. We are talking about multimillion-dollar contracts. We must get this right. The construction industry is important to New Zealand.

I move, That the question be now put.

Motion agreed to.

Part 4 agreed to.

Schedule 1AA agreed to.

Schedule 1 agreed to.

Schedule 1A agreed to.

Schedule 2 agreed to.

Clauses 1 and 2