The Mainzeal collapse: leaky homes, leaky loans and a leaky system

by Philip Ferguson

Remember how in the late 198os and early 1990s, the dominant economic mantra was how the state was inefficient and shouldn’t be in business; private enterprise did everything better?

The inability of the private sector to make the economy more dynamic after a massive series of economic reforms they said would work, then a burst of problems arising out of deregulation – from leaky home syndrome to the growth of fraud to the collapse of finance companies – the need for various privatised businesses (rail, Air New Zealand etc) to be bailed out by the state and taken back into state ownership, and the kind of private insurance failures that have been exposed in the wake of the Canterbury earthquakes, have all put a rather big dent in the idea that the market can solve everything and it works best when it’s least regulated.  Oh yeah, and then there’s the global financial sector meltdown!

This was brought home to me a couple of days ago in a student café.  A student in her 20s, who looked fairly well-to-do, was saying to the person behind the counter that it was crazy to think the market could work out everything; the state had to intervene in things the market couldn’t sort out.  I suggested that rather than the hopeless and never-ending task of trying to make capitalism work, it might be less trouble just to get rid of it altogether.

She thought that might be a bit much, but the latest job losses in Oamaru and now the collapse of Mainzeal (the country’s third largest construction company, behind Fletchers and Hawkins) show just how messed up this system is and that getting rid of it makes more sense than continually trying to patch it up.  This parrot is not resting after a loud squawk; it’s dead, as John Cleese once put it.  After all, what has happened with Mainzeal is not the result of state regulation or individual bad management – the two things apologists for the system usually try to pass the buck with.

Nor is it simply a one-off in the construction industry, as claimed by economic development minister Stephen Joyce.

According to Joyce, this is simply a blip in “the construction cycle where there is undoubtedly a pick up and we’re seeing that in all the trends in terms of increased wages in the construction sector, increases in Christchurch and increased employment and the pick up in things like apprenticeships. I’m reasonably confident the construction sector is coming into an upswing now.”  John Key, however, was a bit more sanguine.  While he argued that Mainzeal will be bought out by some other firm/s, he expressed concern that hundreds of sub-contractors working on about 40 different sites might end up unpaid.  According to earthquake recovery minister Gerry Brownlee, the 400 employees of Mainzeal will not have much problem finding jobs in other construction companies due to the Christchurch rebuild and building expansion elsewhere, such as in Auckland.

Not only is Mainzeal a substantial construction company, it is owned by Richina Pacific, a conglomerate with investments in hotels, car parks, a tannery, automotives, and even an aquarium in China.  Yet, the collapse is being linked to the company’s inability to make a mere $1.8 million payment.  However, Mainzeal is also one of the main companies hit by claims over leaky home syndrome – at present, for instance, it is facing over $30 million of claims about its shoddy home-building.  Five-six years ago it also had to fork out an extra $21 million for Vector Arena because it got the building costs wrong!

Press reports after the Vector Arena blowout – the arena was to cost $72.6 million but ended up costing $94.8 million and being finished months late – claimed the company had “bounced back” (NZ Herald, July 26, 2007).  Reports from after the Vector debacle make interesting reading now.  For instance, the Herald article reported: “John Walker, the New York lawyer who chairs Richina Pacific, told shareholders yesterday the builder had changed the way it worked under the leadership of Peter Gomm, its new chief operating office.

“‘Under Peter’s leadership, Mainzeal has focused on strengthening its systems, re-establishing the disciplines of ‘building right first time’ and appointing people to key positions who will assist in improving Mainzeal’s performance,’ Walker told Richina’s annual meeting.

“‘Mainzeal continued to perform strongly in all areas of the country on its many other projects during 2006 which was reflected in the US$4.9 million operating profit,’ Walker said.”

The ‘bounce back’ took a knock, however, when the Supreme Court ruled that not only home-owners but also the owners of commercial property could take cases over leaky buildings.

In recent months, Mainzeal seems to have suffered from cashflow problems, despite being heavily involved in the Canterbury rebuild.  According to one of the independent directors, former prime minister Jenny Shipley, they had organised bank finance to tide them over but then this finance didn’t materialise.  At that point she and the other two independent directors resigned.

While Shipley can move on to a new directorship or two, with their corresponding fees and endless free lunches, the 400 employees are now jobless and hundreds of subcontractors are up shit creek without a paddle.  Subcontractors often operate on fairly narrow margins and the smaller the subcontractor the more likely they are to be partly in hock to banks and to have done things liked taken out second or third mortgages.  One of the subcontractors is Christchurch-based South Island Shotcrete, which employs 40 workers.  They finished a job for Mainzeal before Christmas and have been chasing payment ever since.  Shotcrete’s Doug Haselden told the Press, “They owe me $264,000 and they knew they were in trouble before I signed the contract. . . I’ve been chasing them and getting every excuse in the book.”

Smith Crane and Contractors, also based in Christchurch, are owed $1.5 million and on Waitangi Day, instead of enjoying a day off, its employees had to dash to worksites to grab their own equipment in case it was nabbed by Mainzeal’s receivers.

The Mainzeal collapse is the absolutely logical consequence of an economic system based on ‘the market’.  Despite its motto, Mainzeal can’t ‘build certainty’ because the market itself is anarchic.  Let’s look at several aspects of this in relation to Mainzeal.

Firstly, take the leaky building syndrome, which has put a big dent in the company.  The pro-market argument is that if you take away regulation and leave building to the market, construction companies will build to a high quality because people want to buy good quality homes and commercial buildings.  Poor quality buildings won’t sell.  But this is not at all how the market works.  Capitalism is not about meeting human needs.  It is about making the most profit possible for capitalists.  Profit maximisation can be guaranteed by building cheap but attractive-looking homes and buildings.  Lack of regulation means that construction companies can do this.  And, remember, these are not rogue builders or ‘cowboys’; Mainzeal, for instance, is very much a mainstream, regular capitalist company with people like former prime minister Jenny Shipley on its board.  The most appalling case recently of how the market ‘works’ is the problems of safety exposed by the Pike River tragedy (see here).

Secondly, take what it produces.  It is part of a larger company with investments in a range of different products and services.  If ‘the market’ goes down in one of the areas the company focuses on, the other areas are not really able to be blockaded off.  A crash in its car park or shoe production profits can, for instance, lead banks to decide it’s not a good lending risk.  Cashflow can dry up and even a fairly small amount like $1.8 million needed in an injection of funds can break the company.

Thirdly, banks and finance companies have been massively hit by a global financial sector meltdown, which affects their ability and willingness to extend loans – although as Michael Roberts has pointed out, many financial institutions remain fairly reckless.  The market can’t actually organise banking and finance to meet need, even the need of capitalists to borrow.  There is no happy equilibrium, no mechanism to unite need for funds with availability of funds.

Fourthly, there are all the problems of ‘over-heating’ in the construction sector when the market is let rip, as happened, for instance, in Ireland in recent years (we’ll be looking at problems of the construction sector and housing in New Zealand in a future article).

What would an alternative be?

Well, take construction.  Imagine if the economy was organised on the basis of meeting human need and was consciously planned by society.  We work out that every year we need so many new homes – houses, apartments, cottages, studio units etc – and so many offices and other buildings and then we build these.  We don’t waste resources by building more, we don’t create artificial economic bubbles by speculation which then crashes and ends up with people owing more in mortgages than what their homes or other buildings are worth.  And we have properly trained, highly-skilled workers to do the building and also to do the building inspections.  Because there’s no private profit in it, there’s no incentive to use crappy materials like the market so often has in building in recent years or do crappy work.

The only way an economy can be planned like this, however, is to get rid of capitalism and the market.  The great mass of the people have to take over the running of society from the capitalists and their political glove-puppets in parliament.  If we don’t do this, the market will continue to wreak havoc on people’s lives.

Further reading:                                                                                                                                        How capitalism works – and why it doesn’t                                                                                              John Key’s ‘vision’: managing the malaise