Australasian Building Control – A Journey from Monopoly to Free Market to Benefits of Hindsight
Paper presented at a World Bank event organized in collaboration with the Global Facility for Disaster Reduction and Recovery and the Doing Business and Subnational Doing Business Teams
In the early nineties I headed up a team that was tasked with the development of a National Model Building Act (“NMBA”). The NMBA became the template for the overhauling of the then building control regimes in the states and territories. Most of the states and territories adopted either all or most of the key reforms. Australia is a Federal country like the US where each jurisdiction in key areas is sovereign, building regulation is one such ambit.
The key reforms were as follows:
1. Private Certification of Building Approvals
The introduction of private certification of building permits so that consumers could either use a private building surveyor from the private or the local government sector to issue the building permit for the construction of a building be it a home, factory or high rise or the local municipal authority.
2. Proportionate liability
Before the States and Territories adopted proportionate liability the law of joint and several liability (JSL) was the prevailing doctrine for liability apportionment.
In a multi defendant legal proceeding where a number of actors are responsible for building defects or malaise all of the actors are joined in a consolidated set of legal proceedings in a court of law or tribunal. When the judge hands down a judicial determination, the judge will make a determination that states which parties are liable.
A garden variety building dispute will involve architects, builders, engineers and building officials. If the judge determines that each defendant has a case to answer then each defendant is found liable and an award for damages will be visited upon all. But if only one or 2 defendants remain solvent by the end of the litigation then the full award of quantum under JSL has to be paid by the solvent parties i.e. the “last men standing”. Ordinarily those would be insured defendants or local authorities. The vice of the doctrine is that solvent parties are required to assume the financial liabilities of impecunious parties. Hence the metaphor “the deep pocket syndrome” and in the case of councils “the insurers of last resort”.
Take the same class of actors as the above under PL, no defendant is liable for the quantum accountabilities of any other party. The given defendant whom is found liable “foots his own bill” period. No one assumes the liabilities to account or make good the damages of another.
3. Insurance and mandatory licensing
All building practitioners were for the first time required to be insured by law. Further a central regulatory body the Building Practitioners Board (“BPB”) was established which had the power to investigate, fine, suspend and cancel a building practitioner’s registration. The regime still exists in Victoria and the Northern Territory although in a matter of months the Victorian Building Authority (“VBA”) will assume the jurisdiction of the BPB and that body will be consumed and disbanded. How this new regime will go is any body’s guess and I am loathe to speculate. Suffice to say Victoria is going it alone as other jurisdictions such as NSW, NT and the ACT will maintain their registration board status quo.
As with regards to insurance the rationale behind making insurance compulsory was to address one of the vagaries of JSL namely that if there were insolvent parties that were called to account, the consumer would be deprived of any financial reckoning and compensation. By making insurance compulsory the consumer was afforded a guarantee of there being compensation courtesy of defendants that were required by law to be insured.
4. 10 year liability capping
A new long tail liability regime was introduced where one had 10 years to issue legal proceedings from the date upon which a building occupancy permit was issued. The occupancy permit (“OP”) is issued by the building surveyor regardless of whether the building surveyor is vocationally domiciled in the private or the public sector.
The rationale was to bring certainty to bear upon the length of time one had to issue legal proceedings. Ten years after the building surveyor issues the OP the ability to initiate a law suit for building defects is “guillotined” and yes I use the word guillotine deliberately because the concept was imported from French based liability regimes where the doctrine is aptly named liability decennial.
Before a number of Australian jurisdictions embraced the private certification regime one could only obtain a building permit from the local council. Many consumers and builders “back in the day” used to complain that it could take weeks and sometimes months to obtain a building permit which compromised efficiency and prejudiced holding costs on projects.
Once private certification was introduced in jurisdictions like Victoria, for the first time an applicant could engage a building surveyor who was, by law tasked with the responsibility of issuing the building permit, carrying out the mandatory inspections and once the building was completed issuing the occupancy permit.
Competition was introduced so that one had choice and it is a fact that the turnaround time for the issuing of building permits plummeted which of course pleased consumers and builders alike. But there is a caveat, happiness was limited to the discrete issue of speed of permit delivery and happiness with the passage of time was not the apposite emotion to describe the feelings of a growing number of consumers whom were of the view that the speed of approval compromised quality of the as built product.
But the local government monopoly was broken and it has now been 23 years since the first Australian jurisdictions introduced the privatised alternative. You may ask the question will the privatised option system return to local government? No unlikely, if for no other reason than local government would be supremely reluctant to underwrite the cost of full time building control again because of budgetary constraints. There would have to be a major crises of system failure for this to occur.
The building industry applauded the privatised system of building approvals because building surveyors under the new competitive system expedited turnaround times for the delivery of building permits. Furthermore building surveyors and local councils then found themselves in a true free market paradigm where they had to be very fee competitive if they wished to win the patronage of the fee paying client be the client a builder, consumer or developer.
This new paradigm boded well for property developers because project holding costs and the cost of deploying building surveyors dropped. It was a Camelot of sorts for the building industry but the first cracks started to appear in the late nineties. In the Victorian Supreme Court case of Toomey v Scolaro’s Concrete Constructions Pty Ltd (in liq) and Others (No 2)  VSA 279 an athlete was severely injured when he fell from a balcony and it was subsequently found that the balcony railings were less than the prescribed heights spelt out in the Building Code of Australia.
It was found that the building surveyor and the building inspector who both hailed from the private sector had been remiss in not ensuring that the balconies were the prescribed height. The Judge observed that the remuneration for the building inspector who inspected the balconies was so inadequate that one could only conclude that the job could not be done properly for that amount of remuneration. The Judge said that building surveyors had to “condescend to the minutiae” when inspecting building work. So what we had here was the free market at play, a building inspector accepting a retainer to perform a critical statutory function for what appeared to the judge as being demonstratively inadequate remuneration.
It should thus come as no surprise to you that I have published at length on the topic of “fee cannibalisation” in the building surveyor domain and have tried to persuade policy makers to classify building officials as a special case in that their fees should be regulated so that they cannot take on statutory approval briefs for demonstratively low fees.
My submission has been that there should be a regulated fee floor that is adjusted annually in accordance with the consumer price index. There has been little support for this idea as it is considered to be anti – competitive.
My argument is that anti competitiveness is a given but one can`t allow for free market forces to assume full expression with regards to a critical statutory function, a function that is designed to protect the public.
In recent years consumer disquiet has gained momentum and there has been a great deal of bad press about the private certification system. The common complaints are along the following lines:
- Building surveyors take too many short cuts.
- They are too close to the builders.
- There is a perception that building surveyors won’t get the job unless they “cow tail” to the builders.
There is an inherent conflict of interest in that if the builder engages the building surveyor then the building surveyor won’t want to bite the hand that feeds it.
I am not going to provide my thoughts on the persuasiveness of the criticisms but what I can say is this, I was Chairman of the BPB for 3 years. The BPB presided over the registration of 25,000 registered building practitioners which included the building surveying fraternity council and private sector alike. In this capacity I had to oversee the practitioner misconduct and disciplinary regime.
It was noteworthy that in that period of 3 years I do not recall one instance where a council building surveyor was prosecuted, yet there were numerous instances where private building surveyors were successfully prosecuted and in some instances lost their registration for what was tantamount to a litany of misconduct misdemeanours. You are at liberty to draw your own conclusions.
The private certification system has thus attracted a fair bit of controversy in recent times but the controversy has not assumed sufficient gravitas to motivate the abolition of the system and a return to the local government monopoly. Changes however are on foot, as it transpires the Victorian Building Act 1993will be amended to effect some changes to the way by which building surveyors conduct their affairs.
One of the changes will have the effect that builders will not be permitted to appoint building surveyors for residential projects. The objective of this provision is to sever the perceived nexus between builders and building surveyors so that builders cannot have preferred service providers that are captive on the basis of guaranteed revenue streams. It will be the hope of the legislature that the relationship of the building surveyor with the builder will therefore be “arms-lengthed”. Time will tell.
The NZ regime may be on the mend and well intentioned law reformers are doing their level best at trying to rectify the problems of a bygone era. Whether they have got it right will have to be judged against the backdrop of a long “road test” as the new system is still being “broken in” so to speak, so watch that space.
Have regard to the fact that NZ does not have a privatised building control option, NZ building surveyors are all public officials employed in local government or as we say in NZ territorial authorities. I mention this fact because there are those in Australia that seek to blame many of the woes in the building industry on the privatised building approval system. But Australia unlike NZ albeit under the watch of municipal building approval officialdom has not encountered what many Kiwi critics would describe as a major system failure in building control.
Were you to visit our major city NZ Auckland, my place of birth and a very beautiful part of the world, you may well ask the taxi driver by the time you get to the CBD what are those tarpaulins or drapes adorning some of those buildings? They, the taxi driver would say, are the notorious leaky buildings.
In the nineties the then government in a burst of euphoric zeal deregulated some key aspects of building regulation. The then Building Act heralded a performance based building code that gave designers, contractors and builders the ability to design and build on the basis that the buildings satisfied performance criteria rather than prescriptive criteria.
I remember addressing conferences in Canada hosted by the American Society of Fire Engineers where the late John Hunt of the “late NZ Building Authority” extolled the virtues of this brave new world. John who was a very charming man, proudly and accurately stated that Australia was using the NZ performance based building code as a reform template for its own Building Code of Australia.
Further the building codes in both Australia and NZ were called up by their respective Building Acts but “here’s the thing” the NMBA inspired Australian Building Acts were very different statutory creatures to the NZ Building Acts. Whereas jurisdictions like Victoria and the Northern Territory in the early nineties introduced regulations that mandated compulsory insurance for the likes of engineers, architects, certifiers and the like, NZ did not. While Australian jurisdictions introduced government controlled registration bodies for building practitioners NZ did not.
NZ also permitted there to be an anomaly where one could build with untreated pine which as it transpired had a tendency to expand when subjected to moisture which in the land of the Long White Could is abetted by a fair bit of rainfall. The net effect is that the brave new world of NZ deregulation, complemented by an inadequate practitioner oversight regime, absent compulsory insurance unleashed the NZ building control maelstrom the “Leaky Building Syndrome” (“LBS”). It should also be noted that in the early nineties NZ flirted briefly with private certification and some of the malaise and I emphasise “some” was blamed on the (and for a long time now defunct) NZ certifier profession.
The Leaky building debacle true to the metaphor describes the real life drama of thousands of buildings that succumbed to the blight of moisture inspired timber and fabric corruption.
The LBS has cost the country billions of dollars and culminated in the proclamation of legislation to establish a Weather Tight Homes Tribunal that is still is in existence and was purpose crafted to adjudicate over leaky building homes disputes. “Several thousands of homes throughout NZ are still awaiting renovation, with a total cost that has been estimated by a PricewaterhouseCoopers report to the Government in 2008 as being around NZ$11.3 billion for a consensus estimate of 42,000 buildings. Other building experts estimate the true cost at $23 billion for 89,000 buildings, and [the number of problematic structures to be] 42,000 because “It’s not if – it’s when for our dripping time bombs”. The New Zealand Herald. Retrieved 3 March 2010.
Little wonder that in the late nineties NZ looked to the Victorian Building Act as a reform blue print of sorts in terms of the establishment of a compulsory and centralised government controlled registration system. It was considered at that time that Victoria had got the building control “holistics” right.
- Both countries in the early nineties embarked upon a deregulation drive.
- One country focused more on the concept of deregulation with safeguards and had greater regard for utilitarian holistics – Australia.
- One country has experienced a massive system failure – NZ the leaky building syndrome – the impact of which still reverberates today.
- One country has paid a terrible price measured in terms of billions of dollars and sadly some lives lost due to leaky building suicide for failing to have sufficient regard to regulatory safeguards and holistics-NZ
- Both countries have witnessed the demise of certain bureaucracies i.e. both the Building Commission of Victoria and the NZBIA. Both bodies born of early nineties law reform initiatives, good intention and optimism (as is so often the case with reforming civil servants), were charged with regulatory oversight but they both in inglorious (and in the case of Victorian headlines) circumstances were disbanded and their jurisdiction wrenched back into mainstream governmental and overarching departmental control.
- In one country private certification came and went very quickly – NZ and in another country (albeit in a variety of guises depending upon the jurisdiction) it has survived to date and continuing – Australia.
Both countries with the benefit of hindsight recognise that the reforms went too far and in some instances not far enough and these are the lessons that should be learnt are as follows:-
Classic free market principles should not apply to building surveyors in terms of that which they charge as they are performing a critical statuary function. The free market often ensures that he who charges the least “gets the gig” hence the term fee cannibalisation.[i] This “professional” predilection that is characteristic of some members of the certifying profession has culminated, according to the sceptics in an economic approach being deployed to the time devoted to tasks such as building inspections.
The use of performance based building codes blended with the building surveyor’ s power to issue building permits that are assessed with reference to performance or objective based criteria rather than prescriptive criteria is an ill-conceived cocktail, fraught with danger and can create an environment where cutting cost “incentivisation” anaesthetises the public safety imperative.
When one introduces a privatised option for building control then one must have very robust safeguards in place to ensure that the certifier cannot compromise his primary “fiduciary obligation” i.e. the protection of the public. One of the ways to do this is to ensure that certifiers are audited annually, on at least one occasion each year. This is precisely what occurs in the legal fraternity where lawyers hold client monies in trust.
When one deregulates one must ensure that the utilitarian dividend to the public is not compromised which requires one to embrace the law reform mantra of “deregulation with safeguards”. Yes deregulate – and yes this will improve efficiencies and yes it will reduce the cost of construction. BUT only deregulate IF the regime introduces robust probity mechanisms such as:-
- Mandatory annual auditing of key building regulatory service providers. In this regard look to Japan for best practice. Note that the Japanese in their Building Act have criminal sanctions for the most heinous of building related regulatory misdemeanours. Some would say that this is a bridge too far, over the top as it were, not the Japanese who canonise the virtue of public protection.
- Ensure that the insurance and liability apportionment “holistics” are on song. For best practice on point look to the proportionate liability and compulsory insurance regime in Victoria. This coupling has endured and unlike private certification has generated no controversy. Do not however score highly the residential warranty regime for builders in Australia however as this regime has attracted a great deal of ire on the part of consumer advocates.
- For best practice in long tail liability look to Victoria with its 10 year liability regime but recognise that that concept is French in derivation. Thank you Thomas for the contribution of your French forefathers on point.
When fashioning new building controls bring a mindset to bear that is akin to that of the master chess player. Look to the future, think through the consequences of each proposed change/move as the legacy of same will be reminiscent of a game of chess where the wrong move will generate unintended consequences. And for policy makers ask yourself this question – Am I the policy maker effecting a change that will one day “check mate” my constituents or am I effecting a change that will culminate in success? Success being defined as utilitarian regulations that improve construction efficiencies with the attendant benefits of lower cost outcomes along with the paramount complements of an as built product that is kind to the consumer and the general public. The later objective after all is the raison d’être of enlightened and responsible building control.
It follows that when the World Bank invests in law reform or microeconomic reform initiatives in developing countries the World Bank is convinced that the reform manifesto as it were is very well thought through. For there to be confidence in this aspiration due diligence will establish that the reforms once enacted, will more or less guarantee the desired outcome so that there will be no unintended consequences as ill-conceived reform can actually be a regressive step both economically and socially and at worst can compromise the public interest.