The Adelaide legal services market is hotting up – but local firms tell ALB’s Renu Prasad that they’re not getting their share of the action.
Lawyers will be familiar with the way that names like “Browse” or “Pluto” or “Gladstone” are synonymous with optimism in the states where these resource projects are based. South Australians have their magic words too – perhaps not quite as many as Western Australia or Queensland, but enough to keep locals convinced that their state is set for a resources boom of its own. Spend any amount of time down in Adelaide and you’ll hear the words “Olympic Dam” and “Woomera” a fair few times. BHP’s copper, gold and uranium activities at Olympic Dam are, of course, already well known but the miner is now awaiting approval for an expansion which could be worth up to A$48bn over the next 30 years. The other focal point is a set of projects slated for the Woomera defence zone, previously off limits to miners. The collective value of these potential projects is said to be up to A$35bn over the next decade.
The billion dollar projects are not just confined to resources. Over two thirds of Australia’s defence industry is reported to be Adelaide-based and a number of international defence contractors have also been attracted to the city by the availability of suitable infrastructure. High profile work includes the Australian Submarine Corporation’s contract to build and maintain the Collins class submarines and more recently a A$6bn contract to build the navy’s air warfare destroyers.
Notable though these projects are, national law firms are not exactly in a haste to open offices in Adelaide. As local lawyers sourly point out, a substantial proportion of the big work emanating from South Australia is being done by east coast lawyers anyway. Minter Ellison, which at 45 partners is the largest commercial operation in South Australia, is perhaps the only top tier firm with a serious presence on the ground. Blake Dawson has a small presence and other nationals have opted for a “fly in, fly out” model. That is understandable – while Adelaide is home to several large Australian corporates such as Santos, Elders and Hills Holdings, there is no doubt that the ASX200 is under-represented. “We bat below our weight compared to Perth, which has picked up quite a few new blue chips over the last decade - we’ve struggled to hang onto them,” says Minter Ellison Adelaide managing partner Nigel McBride.
To understand the Adelaide market is to understand the mix of clients. There are no shortage of big players in town, but the economy has something of an SME feel to it. Law firms have adjusted accordingly.
State of the market
Some lawyers believe that the paucity of blue chip companies sheltered Adelaide from the worst effects of the GFC. “The South Australian market certainly hasn’t seen the volatility that other markets around Australia have seen,” says Kelly & Co CEO Stuart Price. “We don’t have same number of large corporates exposed to global markets. Many East Coast operations were affected, not necessarily through their Australian operations but their involvement with offshore enterprise. If you break down the Australian and offshore components, you find yourself with two very different dynamics in place.”
That view is not universal. Nigel McBride’s experience is that Adelaide is no safe haven from broader economic trends – he believes that the ill tidings simply take longer to reach South Australia. “Historically Adelaide has been a market where, whatever the [national] economic conditions are, we tend to get them later and they tend to be a bit tougher,” he says. “ Last financial year when the GFC was about we were fine. What we’ve found this financial year is a delayed effect – a flattening of revenues, transactions are down and there’s price sensitivity out there.”
This perspective is in contrast to other firms such as Kelly & Co, who report extremely buoyant conditions across all practice areas – in fact CEO Stuart Price told ALB that his firm had recently experienced the strongest month ever in its 94 year history. In markets such as Sydney one might assume that this difference in outlook is due to the different client bases – one might expect, for example, a firm such as Minters to have a very different revenue story from an SME firm such as Macpherson + Kelley. But in Adelaide, there is less premium work available and all firms to an extent are converging upon the same SME client base – a market which, in McBride’s view, is still not out of the woods.
“The SME space is doing it tough,” he says. “Even good private businesses aren’t borrowing. They’re hanging onto cash and adopting a “wait and see” attitude. Retailing is down, people are saving more so the retail and manufacturing sectors are hard hit. Commercial property remains depressed and you’ve got these good businesses who are taking a more conservative cash-oriented view.”
But whatever the economic conditions, firms can still navigate their way into smoother conditions through good management. One Adelaide firm which is an interesting case study for lawyers around Australia is Fox Tucker Lawyers, the firm which was created when a group of ex-DLA Phillips Fox lawyers joined forces with local firm Rankine Tucker last year. Fox Tucker is an example of the advantages of operating as an independent outfit – since the merger, the firm has boosted revenues by 15% and improved profitability from 24% (on the Phillips Fox side of the equation) in 2008 to 39% this year. Thus is the benefit of removing the burden of paying national overheads.“We took out a whole lot of overhead we weren’t using and it went straight to the bottom line. Profit margin went up substantially,” observes managing partner Joseph DeRuvo.
Government
Adelaide private practice lawyers are feeling aggrieved about government work – or to be more precise, they are aggrieved about the absence of government briefs in their workflow. There is a perception that the South Australian government performs an unusually high percentage, by national standards, of legal work in-house. “It’s very hard to get legal work out of government,” says Nigel McBride. “There’s no real opportunity to get core government work as you would in other states. There is a very large Crown Solicitor’s office here, maybe even bigger than us. That’s a major competitor doing government work – if you imagine the same thing in the other markets such as Victoria, you’d take millions and millions of legal spend out of the private sector.”
While McBride would clearly not claim to be an objective commentator on the subject, his views are supported by impartial analysis from other sources. In August last year, the government’s Sustainable Budget Commission investigated a wide range of public expenditure issues and made a recommendation, inter alia, that “all legal work required by agencies should be purchased from a panel of preferred legal service providers.” Under this model, the Crown Solicitor’s Office would be required to compete with law firms for work.
In September, the government delivered a rather equivocal response to this recommendation, indicating that it would “consider greater use of private sector legal services on an ad-hoc basis.” It remains to be seen how that will evolve in practice.
McBride says that the system needs to change – but he is not particularly optimistic that this will occur. “What we hear from many government agencies is that they’re not happy with the level of service, not happy that [government lawyers] are risk averse - quite often unnecessarily risk averse – and not commercial. I don’t see that changing in the near future. I think there was an opportunity for that to change and it has passed,” he says.
PPPs and big work
Local firms have been overlooked not only for routine government work, but on some of the major projects too. One of the most significant projects underway at the moment is the New Royal Adelaide Hospital PPP, valued at approximately A$1.7bn – reportedly the highest value social infrastructure project in Australian history.
Clayton Utz is the government advisor on this project and Melbourne-based partner Jo Pugsley is leading the Clutz team. Local firms acknowledge that Clayton Utz is a pre-eminent advisor in this area, but they are also unhappy that they were not given the opportunity to tender for this work and that the government appears to have by-passed local talent.
“The work that originates from government can more than adequately be done by local firms - we have the experience and the skills,” says Stuart Price. “Our lawyers have done the large projects, they are experienced in the kind of things that are being referred out. I would say that at the macro level if the government is keen to support the local economy, they should give us a fair go so we are at least considered. We are not saying local firms should be appointed first and foremost but we should be given a fair go.”
McBride says that the government appears to have heeded the message, although it will be difficult to see what actually transpires until external advice is next needed on a major project. “Not too many of these projects pop up every day,” he says. “The local firms and the Law Society have had a very strong view about the fact that there wasn’t much procedural fairness given to local firms. I’ve been assured that will change, but we’re waiting to see projects where [we might see that] change –they don’t pop up every day. If you miss them, you miss them.”
Local firms still play a role in the big projects, but more commonly via a referral from a national firm. Kelly & Co, for example, worked with Mallesons to assist a consortium which bid (unsuccessfully) for a role in the New Royal Adelaide PPP. Adelaide firms value the relationships they have with national firms and the source of work this provides. “We’ve seen a strong inflow of work from the East Coast and the top tier for a multitude of work,” says Stuart Price. “Some of our people have returned to South Australia from some of those larger firms and they’ve brought back those personal relationships – these are the “go to” people in Adelaide because they are already known for the quality of their work.”
Another example of such a relationship in action is Finlaysons, which has been brought on board the New Royal Adelaide PPP by Freehills to assist with a range of matters. “It’s producing work for us and we’re pleased about that - inevitably there is a reasonable amount of legal work which arises out of such a project and all indications are we will get a reasonable role in that,” says partner David Martin.
However, the Finlaysons-Freehills relationship is not exclusive. “We act for a range of different firms,” says Martin. “We’ve remained firmly non-aligned and it’s thus far worked to our advantage - we’ve been the beneficiary of work from quite a number of major national firms who don’t have a presence in Adelaide.”
That helps to explain why a number of Adelaide firms have opted not to open offices outside of their home state. “Inevitably there is a compromise,” says Martin, “You become an immediate competitor and there has to be some level of impact on that relationship, I’m sure.”
Martin says that his firm still performs work for national clients and has not excluded the possibility of opening interstate one day. “It’s not part of our strategic plan at the moment but it is always under review,” he says. “At the moment we consider there is a lot going on in our own backyard. We’re keeping a very strong eye on what’s going on locally, rather than taking our eye off the ball a bit to focus interstate.”
Resources
BHP has a long-standing relationship with Blake Dawson and the firm’s decision to open an Adelaide office is understood to be in anticipation of extra work from the Olympic Dam expansion project. “If the expansion goes ahead, there will be a huge demand for legal support – it will be interesting to see if any of the other BHP firms decide they need to be here,” observes Nigel McBride.
Minter Ellison has recently been engaged to advise on the operational aspects of the existing Olympic Dam site, a move which appears to have displaced Finlaysons, which previously performed that role. “Currently we are doing some BHP work but I must say there hasn’t been much work,” admits David Martin. “We’ve still got a number of things that we’re acting on but in terms of the ongoing role we’re not sure what the status is. This is one of those areas where not being a national firm has not worked in our favour – BHP have indicated they want to deal with national firms. However, we’ve also had indication that the doors are not closed on us - they will still be adopting a horses for courses type approach.”
Clearly there is more to the South Australia resources story than BHP and Finlaysons still has a strong client base which includes Santos, Ozminerals and a range of others who are very active. “We’re still very positive and looking forward to the work that’s coming out of the mining sector,” says Martin.
Another positive feature of the SA resource market, for those who are inclined to think in the longer term, is that many projects are at a relatively early stage. “A lot of stuff in South Australia is at the exploration stage,” says Joseph DeRuvo. “That’s good for us - have a look at QLD and WA for example, they are often past that stage and at the mining stage. We’ve still got a lot of companies at the exploration stage; the next stage is mining and processing - we’ve got many, many years of work ahead of us in that sector: not just mining, but also associated industries.” It means that local business people are making investment decisions with the expectation of several decades of resources activity. “I’ve got a client who had a very successful manufacturing business making alloy wheels. He has now changed his focus to providing hose connections for mining industries because he sees that as the way of the future,” says DeRuvo. “He’s re-engineered his entire business because he’s seen that he’s got another 20 to 40 years of work in that industry. There are a lot of people thinking like that.”
As has been the case in other states, junior miners are expected to have a major role in the emerging resources power play. “A lot of juniors are taking advantage of mining licences they’ve had for some time that they can’t develop - some of the bigger companies want to take over their mining licenses,” observes DeRuvo. “There’s a lot of movement in that industry.”
Agribusiness
When the drought broke in Queensland and Victoria, it was followed by widespread flooding. South Australia has managed to escape the latter extremity and the rural sector has benefitted accordingly. “One of our clients Viterra, just to take an example, just had a record year in terms of bulk grain handling,” says David Martin. “That’s indicative of a renewed buoyancy in the rural sector which adds flavour to our optimism for the economy moving forward.” However, one exception is the wine industry which is continuing to undergo some well publicised restructuring and asset disaggregation. “There are a wide range of assets that are looking for a home - major wine groups are clearly revising where they want to go,” says Nigel McBride. “It’s been a bit of an annus horribilis.”
