van de Molen TimTIM VAN DE MOLEN (National—Waikato): Thank you Mr Chair. It's a pleasure to take a call on this particular bill and there's an aspect within this that I want to raise with the Minister because broadly the intent of the bill is good. We absolutely support that. We've supported it so far and in fact it's looking to enhance a piece of work that was put in place under the previous National Government to try and better protect participants within the construction sector particularly at the lower end of the contract spectrum subcontractors and the situations where we have seen unfortunate cases of a head contractor or one of the larger participants falling over and then those subcontractors or other participants further down the contract ranking being left out of pocket. So the retention money process was to ensure that that money being retained by the head contractor for example was set aside for those subcontractors.So we've supported the bill to this stage. The amendments made through the select committee have been relatively straightforward and in the Minister's Supplementary Order Paper (SOP) there are technical changes that we support but I have proposed an SOP that I want to speak to because an issue's been raised with me off the back of this piece of legislation going through its stages so far and that's around the potential and I believe unintended consequence tying up additional retention money that could be used in cash flow.So I'll run through an example because I think it's important to give context to how it could play out in a particular construction contract scenario where you have in this legislation currently proposed a party A being the client or head contractor and a party B being a subcontractor and party A withholding money from party B that needed to be kept in trust for the period when it is subsequently released or any remediation work deducted from it and the remainder released. That all makes sense. The challenge arises in the situation where there are more than those two parties and indeed that's quite a frequent scenario. It's a situation where you have a client that engages a head contractor to carry out the contract. The example I'll use to try and keep the maths a bit simple is you might have a $10 million contract where a client engages the head contractor to deliver that project for $10 million. So the client then is eligible to retain $1 million as the typical 10 percent retention threshold and put that in trust. So that's 10 percent of the total contract put in trust.That head contractor then engages a subcontractor to do often the majority of the work. So the head contractor might do say 20 percent of the work—$2 million of the contract—and the subcontractor does $8 million. So that head contractor then retains 10 percent of the $8 million—$800000. And then you can get the scenario where the subcontractor engages a sub-subcontractor so maybe they do $5 million of the work and they pass on $3 million of the work so they retain a further $300000 of retention money. The issue there arises because you have 10 percent of the retention money held by the client. You have a further 8 percent so $1 million held another $800000 and another $300000. So you end up actually with $2.1 million of retention money held on that $10 million contract which is well above the 10 percent that is eligible to be retained. And this only arises in a situation where you have multiple participants within a construction contract which actually is quite frequent. So the issue there then becomes that you're tying up a significantly higher amount of working capital than should be the case. So each of those steps within the chain then has to have that money sitting aside and indeed in some cases they may be paying out retention money at the end of a contract before they've potentially received all that money down from the tier above them. So what I've proposed with my Supplementary Order Paper is to try and address that issue by making an amendment to section 18 (FB) in clause 7 which is the section around complying instruments to effectively enable multiple parties to become part of one complying instrument.So what I've proposed there is new subsection (3A) Where there are multiple construction contracts for a single construction work [or project] any 2 or more of the party As or party Bs who are a party to one or more of these contracts can agree to issue a single complying instrument for the whole of the work covered by their collective contracts." So what that would enable us to do with this legislation is then to capture that unintended consequence and enable all of those parties to agree on a collective complying instrument—for example a bond held at the top level by the client issuing that main contract to the head contractor. In the example I used the $10 million contract they would hold a $1 million bond being 10 percent and all subsequent parties can then connect into that same retention. So you achieve the outcome of securing the retained funds in a safe environment so that they are protected irrespective of the solvency of the head contractor down the track. That's the issue we're trying to address here—to ensure that money is available to be paid out to subcontractors and the likes once they have completed their works. But it gets away from that additional cost that we are adding into the industry by seeing effectively a doubling of the retention money being held.This when we look at the Ministry of Business Innovation and Employment's (MBIE's) figures saying right there's $31 billion - odd of contracts—in the scenario I gave where we saw $2.1 million so effectively an extra 110 percent over and above what we should be retaining is being retained we're looking at about $3.5 billion dollars' worth of working capital being constrained through the construction pipeline going on MBIE's figures and that's a pretty significant level.So what I'm proposing to do is to create a scenario to help us alleviate that pressure and we've looked at a few potential SOPs over the last few weeks to try and address this potentially having all party As and Bs retaining in a single trust model. That was considered to be out of scope of the bill by the Clerk's Office. So we've ended up with this scenario which is imperfect but I believe can achieve the intent of unlocking that potential working capital by enabling all of those parties A and B to convalesce to agree to the single complying instrument—for example the bond—and to therefore create the capacity to get on and do the project achieving the intent of the legislation i.e. protecting those retention funds but unlocking that working capital that is I believe unintentionally captured as the legislation is currently proposed.So I'd be really interested in the Minister for Building and Construction's insights around that and whether they're aware of the risk for potentially locking up additional capital over and above what was anticipated and the potential cost of that for the industry. Thank you."