Union Privilege v. Workers' Rights

Coal Reform: The Hunter Valley No. 1 Story

Allan Davies

Ladies and gentlemen,

Coal reform started over 200 years ago and in another 200 years will still be occurring. It is no different to any other industry---to be profitable and to provide secure jobs coal mines have to be low cost, productive and efficient.

Coal reform in recent times has been all about removing impediments to improved productivity and profitability.

An important chapter in the reform process took place in the last 4 years at the Hunter Valley No 1 mine. It was here, in the heart of the Hunter Valley and the heartland of the CFMEU (the main coal mining union), that the pace of reform was accelerated.

The Hunter Valley No 1 story is about the best deposit of coal in the Hunter Valley and a mine that was unproductive, inefficient and in grave danger of becoming unprofitable. My role in this story was General Manager of the mine located on site from January 1996 until August 2000.

What I would like to do today is to examine three questions:

1. What was it like in 1996 when I arrived at HV1 and what had to change?
2. How were changes made at Hunter Valley No 1 to make the mine productive and profitable?
3. What does the future have in store for coal and continuing reform?

I will confine my comments and use data that is relevant to early 2000. Last year the mine was merged with the nearby Howick mine into one operation called Hunter Valley Operations and that has made disaggregation of recent data quite difficult.

Background

Firstly some background on the mine. Hunter Valley No 1 is located between Singleton and Muswellbrook in the Hunter Valley of New South Wales. The mine commenced operation in 1979 and is a large truck and shovel mine. In 1999, it produced 5.6 Mt of export coking and steaming coal---all of which was exported through the port of Newcastle mainly to customers in Japan, Korea and Taiwan. At the beginning of 2000, it employed 260 people, compared with 585 three years earlier.

Hunter Valley No 1 is also located in a very intensely mined area as you can see on the map.

What Was it Like at Hunter Valley No 1 Four Years Ago?

On the ground it was like this:

• In 1996, the mine produced approx 5 Mt with around 585 people who enjoyed an average annual income of over $70,000.
• The size of this workforce equated to a labour productivity of around 8,500 saleable tonnes/employee/year or approximately 110,000 tonnes of total movement (overburden and coal) /employee/year.
• In 1996 the mine made $1 per tonne profit and then coal prices fell $3 per tonne in 1997
• Demarcation existed between staff and workers (staff were not allowed to operate or maintain the 'workers' equipment which included trucks, loaders, shovels, the coal preparation plant and the rail loading point)
• The union co-managed the operation and were the main communicators with the workforce. The union delegates were regarded as the prime source of information
• Unproductive tolerance time or shower time of 15 minutes per shift was provided to everyone irrespective of whether a shower was required.
• Discipline was ad hoc and inconsistent
• Shift patterns were fixed and shift lengths were 8.5 hours. For this a hot seat change on all equipment was supposed to occur but did not. All overtime was paid at double time including the last 1.5 hours of every shift. A worker was paid for a week a total of 50 hours pay for 41.25 hours at work.
• Allocation of an employee to another shift, for overtime or to another roster was done by seniority. In a downturn, selection for retrenchment was based on seniority.
• A plethora of restrictive practices occurred on each shift depending on how influential the shift delegates were.
• An outdated production bonus system existed based on coal tonnes mined instead of a more equitable and fair system say based on costs and productivity
• No formal assessment of performance occurred
• Restrictive arrangements were imposed by the union with hiring contractors
• Whenever it was necessary to initiate change the union would veto the change unless the company paid the workforce more.

To summarise, management did not manage and the union ran the operation. This was encapsulated in a comment I made to a group of journalists in 1997 when I said---'if we want to hire, fire, promote or reward and allocate overtime we first need to ask permission of the union.'

As an exporting business, Hunter Valley No 1 is subject to international trends in price and exchange rates whilst incurring all costs in A$. Coal exports are generally sold in US$. I would like to illustrate the basis of the problems in the coal industry and at Hunter Valley No. 1 with two graphs.

The first one relates to coal prices. The graph shows since 1983 contract coal prices for soft coking coal and thermal coal in MOTD terms. These coals are the predominant coals exported from the Hunter Valley through Newcastle. You will note that prices for thermal coal have remained around A$45/t FOB for more than the last 15 years. For each tonne of thermal coal sold, the revenue per tonne in A$, has stayed much the same. Of course recent falls in exchange rate have improved A$ prices though for how long we are not so sure.

The second chart shows what has happened to costs---this graph is of average NSW coal industry earnings in A$ MOTD. As you can see, average weekly earnings have increased from about $600/week in 1983 to over $1,600/week in 1999---an increase of over 250%. Average weekly earnings translate to labour costs with the addition of payroll tax/ superannuation levies etc. Labour costs make up about 40% of the cash costs of a mine. Other costs of running a coal mine have also increased considerably over the last 15 years---everyone wants their slice of the cake.

The only way to ensure a profit in these circumstances is to increase productivity. This can be done by increasing total production of coal with only a marginal increase in costs or producing the same amount of coal with significantly reduced costs that invariably means fewer pieces of equipment and consequently fewer employees.

At Hunter Valley No 1, the crossover point when costs were going to become greater than revenue was in 1997. We had to do something to ensure the mine remained viable. That 'something' was to improve productivity and that meant eliminating unproductive work practices. And that's how accelerated coal reform in the Hunter Valley commenced.

I took the second option because the coal market was oversupplied---the aim was to reduce absolute costs and focus on improving labour and machine productivity. This meant reducing the number of pieces of equipment by over 30 from 80 including 22 out of 43 large trucks and making the remaining equipment work harder. An obvious consequence was that employee numbers had to reduce and that happened. In October 1998, mine employment was restructured to 260, down from 585 in early 1997. In that restructure the best people were retained rather than retrenching based on seniority that was the traditional coal industry practice.

The next chart shows how productivity increased over a three year period from the start of 1997 to the end of 1999---but this is from a very, very low base. After the restructuring in October 1998, productivity took a significant leap, it doubled since the beginning of 1997.

There had to be dramatic changes at Hunter Valley No. 1 to improve productivity and reduce costs so that the mine could remain viable and made competitive with other operations in NSW and with overseas producers of coal.

Now My Second Point: How Were the Changes Made?

How were the changes made that had to happen to improve labour productivity at Hunter Valley No. 1. They fell into 3 main areas:

Firstly, management support, secondly, changes to the approach to making change and finally changes to the legal environment for making change.

Management support

• Strong, clear leadership from very senior management was critical and when it occurred it was unique to the coal industry. This leadership and unwavering support gave Hunter Valley management the confidence to be bold and innovative when mediocrity and incrementalism would have been an easier course.
• The message heard by Hunter Valley management from the new CEO of Rio Tinto Energy in mid-1997 was that dramatic change was required, that incrementalism was not enough and that change which was good by Hunter Valley standards would be inadequate. This message was given constantly by the CEO during the period from 1997 to 1999.
• The most impressive displays of support occurred when Rio Tinto did not waiver during lengthy industrial action at HV1 during 1997 and when the ICEM and CFMEU campaigned against Rio Tinto and sought to make agreements with it. I would say however, that this approach seems to have changed in recent times with Rio Tinto now accommodating union wishes after a successful corporate campaign waged by the unions last year.
• The visibility and credibility of leadership support was also important on site. A critical example was in early 1997 with the support on site we offered employees who took up Australian Workplace Agreements in circumstances when we could have backtracked on the promise of an easier route to a collective agreement. This was seen as a sign of changed management behaviour, increasing the credibility of site management and ensuring it could call upon support from line managers and other staff in periods when intense effort was required.
• Not surprisingly, when senior site management developed a clear view of the future and knew how it was going to get there, line management on site was very supportive. Without supervisory line management support, major change is impossible to implement on the ground.

Approach to change

The second major change was the ability to make changes without having to first ask permission from the union. When management embarks on major change supported by strong leadership, it will inevitably make decisions that will not please the union. Union opposition and the company's response can be summarised in a number of ways:

• If the changes are large, a militant union will undertake a public and political campaign to pressure local, business unit and corporate management to compromise. Management has no choice but to respond to the union campaign. If it does not respond skilfully it will suffer major disadvantage in the media, before the AIRC and on site. While implementing change in a low key, low profile manner is undoubtedly preferable, it is the union which will determine whether that is possible. Publicity is a key part of any union campaign to resist change and at Hunter Valley No 1 the union used this technique widely.
• In response, the company must present a clear and credible business case built around explaining the need to remove outdated and inefficient work practices. If a company has decided it must make change it should clearly be for business not ideological reasons. The nature of the employment arrangements are irrelevant.
• The company case should be well argued in the media by the senior management and internally by making maximum use of supervisors as the key point of communication with operational employees.
• The company should capture the language and symbols necessary to reinforce the case for change and the process of it. For example, in the first strike in 1997 we awarded staff trophies for producing coal while the rest of the workforce was on strike. That presentation which was publicised by inviting print and TV media to attend still riles the union.
• Companies have wins and losses in the AIRC but if you have a strong well argued business case for each proposed change and your actions are fair and legal, you will survive.

And finally, like any major change program, faster is better than slower. Managers should be encouraged to go faster than they think is possible.

By using the above approach and obtaining the best possible legal advice and ensuring the changes were demonstrably fair, we were able to remove the archaic and unproductive work practices I found when I arrived at HV1.

Changed legal environment

The fact that HV1 was in dire straights when the Workplace Relations Act was introduced was just a coincidence. However, had the legislation not changed, our ability to make change quickly, more lasting and with lower costs would have been a lot more difficult. The WPA helped us by providing more choice for the Company and employees in several ways. Firstly, it has provided the facility, if an employer or employee wishes, for access to a variety of employment options. Secondly, access to changed employment conditions is available and finally the Act has redefined the process of reaching agreements on employment options and conditions.

At HV1 this meant that employment arrangements changed over the last 4 years. Now, by having available a range of employment options, employees were able to exercise choice as to how they were employed and whether or not they were in a union. There are about 10% of production employees who signed AWAs. The remaining 90% are now employed under a Collective Agreement reached in October 2000. Management, from supervisors to managers, were employed mainly on individual contracts. This changed from three years earlier when all staff employees other than senior site management were employed on the various coal mining awards.

Employment conditions have also undergone major change in the form of:

• removal of non allowable matters
• simplification of remaining 20 allowable matters
• removal of LOFO
• removal of custom and practice

To be able to utilise these legislative changes and implement lasting changes on the ground, it is necessary to have alternative systems available to replace the old archaic systems.

A good example is the removal of LOFO. In the past there was no difficulty in determining who should go in a downturn if the rules were governed by LOFO. If there were 200 employees in your company and 50 had to go and you were number 151 on the seniority list, you knew you had to start looking for another job even if you were the best worker. In the past at Hunter Valley No 1 you probably didn't have to worry too much about another job because the union ran a closed shop which meant that if a vacancy arose at another mine you would be put back on in turn. However, if an employer choses to keep the best, a selection process without LOFO must be established to determine who are the best workers. Retention of the best workers at HV1 in late 1998 was the first time a merit based selection process had been implemented for retrenchment in the NSW Coal Industry.

You have seen the productivity difference achieved at HV1 since October 1998. Despite it being blindingly obvious that the best workers were selected to stay and work the mine, the union ran 108 unfair dismissal cases in the AIRC after the restructure. There were 55 days of hearings over almost 18 months and there still has been no decision, 2_ years after the restructuring at HV1. To be successful, employers must have a long-term view and a lot of determination and persistence to take on changes like this against such opposition by the union.

Changes to the agreement making process have also occurred. Now it is no longer the case that parties will end up going straight to the AIRC for arbitration if an impasse occurs with negotiations. Protected action in the form of strikes and bans by the workers can occur and the company can lockout. If a company cannot afford to reach agreement on the union's terms, it does not have to, providing it can generate enough leverage to resist the union's demands. At HV1 continuing to operate the mine during strikes so that the workers traditional weapon the 'strike' became the company's weapon was a very important initiative. The unions did not like this and tried unsuccessfully to prevent us from working during strikes by encouraging the Mines Department inspectors to stop us over alleged safety breaches and undertaking a concentrated media and political campaign.

However, in October 1997 the unions had to yield and changed their approach by seeking termination of the bargaining period in the AIRC. All along, my intention was to reach a collective agreement on suitable terms. The issue was not whether an employee was employed under an individual contract or a collective agreement or was in a union or not in a union, it was how people worked. Yes, it is true that I opposed arbitration in 1997 and 1998, not because I preferred the law of the jungle, but because I believed the AIRC couldn't hand down a result that would satisfy everyone.

The result of the union's action was that after appeal and counter appeal, arbitration under s170MX of the WPA was conducted in 1999. It is history now that in October 1999 the company won a stunning victory in the 'all's fair in love and war' case and the workers and the union were not satisfied with the result. The union initially appealed the decision to the High Court and the workers still had to wait for a pay rise despite my making five offers to them in three years.

As the result of changes to legislation, a weapon which companies and unions have used more and more is litigation in the courts outside of the AIRC. I don't think this is necessarily good in all circumstances but one thing I do know is that it is awfully expensive. Companies planning major industrial change in this millennium have to be prepared for these legal contests because the unions surely are.

There have been numerous AIRC, Federal Court and Supreme and High Court actions associated with change at HV1, which I will briefly summarise:

• Numerous applications by unions to AIRC under s99 of the WPA
• Numerous s127 applications to AIRC by company and union.
• Company and union application to AIRC to terminate bargaining period
• Appeals to AIRC, Federal Court and High Court by company and unions resulting from AIRC or Federal Court decisions
• s170 MX arbitration in the AIRC
• Union application to AIRC alleging 108 unfair dismissals
• Several Federal Court actions by union over alleged breaches of Award or Act
• Supreme Court injunctions by company under common law or s166 of WPA
• High Court appeal by the company in relation to the original decision by Justice Boulton to terminate the bargaining period.

All this activity kept the lawyers busy and of course was able to divert considerable management attention away from the business of mining and processing coal. In the process however, leadership of line management improved because there is nothing more harrowing and character building than giving evidence and being cross examined in front of a hostile bench and gallery.

The Future for Coal Reform

Reform in coal will continue and it will be successful provided:

1. There is a demonstrable business case
2. Change and restructuring is carried out within the legal framework, and
3. There is corporate capacity and will to see the changes through to a conclusion.

I would like to examine each of those points briefly.

Business case

The case for change must be argued for good business reasons, not ideologically. A focus on work practices, inefficiencies and rorts will get the support of management, genuine employees and the community.

However, in a market that is subjected to strong demand and rising prices, the business case becomes more difficult to explain if the focus of the change is just cost reduction. History shows that for commodity markets strong demand, price rises and low exchange rates tend to be cyclical in nature. A weak market will return and businesses must be capable of withstanding those circumstances when they occur. The issue is achieving low costs and high productivity whatever the market.

Legal environment

In the last four years there has been a lot of opportunity to reform businesses due to the changes in the legal environment. Award simplification, introduction of AWAs, removal of excessive union power through abolition of closed shops etc has meant employers have had greater flexibility to determine how they run their businesses. This in turn has resulted in improvements to productivity, reduced costs and increased profits.

Capability and Will

With a sound business case and a supportive legal environment, the potential for reform and change is very high. However, it will not happen unless companies demonstrate they have the will to make it happen.

Management must be capable of understanding the business, deciding on the right approach for change and then seeing it through. Another way of expressing this is to say management must be capable of demonstrating exemplary leadership.

Very few companies and executives have the right combination of will and capability to plan and execute major change. Both qualities are necessary to succeed because it is very hard to change and reform the huge inertia of the 'status quo'.

So, looking back at my 3 points:

Firstly, what had to change at Hunter Valley No 1 in 1996? The answer to that question was 'management had to change---management had to manage to remove outdated work practices to enable the mine to remain viable'. There was a simple business case for the need for change. And change will continue to rush at us. Hunter Valley No. 1 just happened to be the first in the firing line because it did not have an agreement that prevented us from making major changes quickly to meet the requirements of the market.

Secondly, the Workplace Relations Act has assisted tremendously in facilitating change. Nevertheless, a sympathetic Act is no substitute for senior management support and actually confronting the issues and taking control on the ground. We made change at that mine for explicit business reasons---not as our opponents would have it for ideological reasons. I say this again---it makes no difference to me if an employee is employed under a Collective Agreement or an AWA, whether they are a union member or non-union, as long as they are committed to working to the best of their abilities and with a clear understanding that a profitable mine will be profitable for them. Any employment arrangement in this age has to provide the basis for major improvements in productivity and reduction in costs. Currently, this approach runs counter to the union's philosophy.

And finally, will coal reform continue in the future? Yes I believe it will. The issue is, at what pace? The answer to that question will depend on the robustness of the business case, the support that can be derived from the legal environment and finally the capability and will of the people involved to make it happen.