Western Australia: It’s the country’s largest state by size and increasingly by revenue and home to some of the biggest mining operations in Australia. More than A$200 billion is to be spent on a variety of mining and LNG projects in the region in the coming years, on the back of a period of already significant investment. According to the latest update by the Bureau of Resources and Energy Economics Australia, if all the projects come to fruition as tabled, total resources sector investment in Australia will exceed half a trillion dollars, and more than half of that will be in Western Australia.
Unsurprisingly, on the back of all this investment, the economy of Western Australia is expected to grow by 4.5 percent this financial year and by four percent annually for the next three years, according to West Australian state treasury forecasts. Legal services within the state have also been experiencing a boom, with several new international legal brands setting up in the past 18 months including Norton Rose, Allen & Overy, Clifford Chance, Holman Fenwick Willan and Squire Sanders.
Thriving market
Despite the increasingly competitive nature of the market, all firms ALB interviewed had revenue increases in the past year and expected further revenue and staff increases in the coming 12 months. Jackson McDonald for instance has had revenue increases of about seven percent this financial year and expects a nine percent increase next financial year. “This is due to the volume of work, rather than price increases,” says CEO John McLean. The firm is also looking to increase fee earner numbers by approximately five percent.
Perth firms by lawyer headcount
|
Firm |
Partners |
Fee Earners (Lawyers) |
Total |
|
Allen & Overy |
4 |
(not disclosed) |
(not disclosed) |
|
Allens |
13 |
63 |
76 |
|
Allion Legal |
11 |
29 |
40 |
|
Ashurst |
22 |
95 |
116 |
|
Corrs Chambers Westgarth |
15 |
45 |
60 |
|
Freehills |
27 |
123 |
150 |
|
Gilbert + Tobin |
8 |
32 |
40 |
|
Jackson McDonald |
32 |
110 |
142 |
|
King & Wood Mallesons |
17 |
91 |
108 |
|
Lavan legal |
21 |
90 |
111 |
|
Middletons |
7 |
29 |
36 |
|
Norton Rose |
21 |
52 |
73 |
|
Squire Sanders |
14 |
43 |
57 |
Michael Blakiston, whose previous firm Blakiston & Crabb joined Gilbert + Tobin in late 2010 has also had a successful year following the merger. “The transactions we are working on now are bigger than what we had worked on previously, and that is obviously a reflection of the G+T brand,” says Blakiston, who is the managing partner of the office. “It’s fair to say we expect a buoyant year and we are working to ensure we are geared up for the market’s needs. Right across the firm we have added five or six people and in the resource space we expect to add staff again in the next six months.”
Uncertainty
However, despite the solid fundamentals, some in the market can see the cracks beginning to form as a result of the region’s reliance on the resources and energy industries. “All the projections around the West Australian state economy are on the back of the resources sector remaining strong,” says Norton Rose Australia Perth head partner Jenni Hill.
With ongoing uncertainty across the globe from Europe to China, even some in Western Australia are approaching decisions cautiously according to Phil Lucas from Allion Legal. “The success of Western Australia is at all times dependent on the broader international position and demand for commodities which we produce,” he says.
The delicate state of the global financial market is having an impact on the ability of projects and companies in the state to gain funding or raise capital according to Allens Perth head partner Andrew Pascoe. “It remains very challenging for a number of projects to get appropriate debt finance, there have been some successes recently, but overall it remains challenging. The general lack of confidence globally could have an impact on the willingness of companies to execute major transactions or investment decisions in the short term,” he says. A significant reduction in the GDP growth in China would also have a significant impact on the West Australian economy.
At a more local level, ongoing issues such as infrastructure, labour and legislative changes are also beginning to impact sentiment within the state. “Within our market sector there is a lot of caution, and a lot of the work and success will be dependent on whether some of the domestic issues get resolved,” states Lucas. “There is a frustration that because of what is happening domestically we are not taking advantage of all the opportunities that are there, because people are more circumspect in their outlook.”
Geoff Simpson, Allen & Overy Perth managing partner, says that the introduction of the Mining Resources Rent Tax (MRRT) has already had a negative impact on the state because the junior miners will pay a disproportionate share of the tax. “It is our impression that the tax has already had a significant impact on foreign investment because of the uncertainty which it has generated over the last 18 months or so,” he states. “This, along with the impact of other factors has prompted many foreign investors, especially in coal, to have a closer look at opportunities elsewhere.”
However, this view is not shared by Pascoe: “My sense is that the market has absorbed MRRT and moved on. It has been factored in and people are making decisions with it and the carbon tax included. I have not seen any evidence of major decisions not being made or being changed because of the introduction of those two legislative reforms.”
Booming state, booming costs
While Perth firms are undoubtedly reaping the benefits of working in a resources and infrastructure vibrant state, behind the mounds of work lies more serious issues. The side impact of all the wealth from the mining and resources sector is that “the costs of operating any business in Western Australia has increased in the last five years,” says partner in charge of the Perth King & Wood Mallesons, Michael Lundberg.
Perth has climbed the ranks in terms of most expensive cities to live in across the world, coming in at 13 last year, well ahead of global cities such as London, Rome, Berlin, Hong Kong and Beijing. According to commercial real estate services firm CBRE, rents in Perth jumped 6.3 percent in the second half of 2011 as vacancies plunged to 3.3 percent. “We have the lowest tenancy vacancy in Australia and possibly in the world,” says Norton Rose’s Hill. “You have to be creative about how to maximise office space, as people have very clear ideas about how a law firm should look and operate.”
Allion Legal is currently evaluating its options as it looks to add a new practice and up to five new lawyers in the coming 12 months. “The sheer expansion of the firm has put pressure on this office in terms of its size,” says Lucas. “One of the issues we are getting our heads around at the moment is how do we satisfy our office requirements in the short-to-medium term, in a highly competitive market, where it is almost full tenancy? Not to mention fitting out the premises if you do move.”
Private practice wages for Perth major/top tier firms
|
Year level |
Low |
High |
Middle |
|
1 PQE |
$67,000 |
$79,000 |
$78,000 |
|
2 PQE |
$77,500 |
$96,500 |
$87,000 |
|
3 PQE |
$86,500 |
$117,500 |
$102,000 |
|
4 PQE |
$98,500 |
$132,500 |
$115,500 |
|
5 PQE |
$112,500 |
$147,500 |
$130,000 |
Based on the combined information of Hays and Mahlab Recruitment data 2011
Partner remuneration in Perth
|
Firm size |
Mode |
|
Top Tier/Major |
$1,325,000 |
|
Mid tier |
$745,000 |
|
Small commercial |
$385,000 |
Based on Mahlab Recruitment data 2011
In-house salaries in Perth
|
Year level |
Low |
High |
Middle |
|
1 PQE |
$65,000 |
$80,000 |
$77,000 |
|
2 PQE |
$70,000 |
$94,000 |
$89,000 |
|
3 PQE |
$85,000 |
$118,000 |
$110,000 |
|
4 PQE |
$100,000 |
$143,000 |
$131,000 |
|
5 PQE |
$120,000 |
$160,000 |
$149,000 |
Based on Mahlab Recruitment data 2011
Rates pressure
The increasing cost of doing business has caused many firms to re-evaluate their rates and what they charge their clients in order to remain profitable. “The cost of doing business leads to pressures on hourly rates, and then people start saying lawyers are expensive,” says Blakiston. “You have to make sure that your proposition represents good value.”
Lucas has also seen increasing pressure on hourly rates because essential services are becoming more expensive. However, he does not see the need to disproportionately push up rates in the near future. “We don’t feel the need to go above and beyond the increase in costs, which are going up about 10 percent a year,” he says.
While many in the market are aware that they need to increase rates in order to remain profitable, according to a number of firms, one international firm is discounting rates in order to secure work, particularly in the transactional space. Several firms, who asked not to be named, claimed Allen & Overy in particular had been “below market average” or “overly competitive”. However, Simpson from Allen & Overy Perth, claimed otherwise: “I have not felt the need for A&O to be overly competitive in regards to rates in the past 12 months,” he says. He did however add that it was a highly “competitive market” and in pitches against other firms for work “one element of the pitch is price,” he observed.
Office space comparison (Premium)
|
Location |
Current vacancy Q1 2012 |
Projected vacancy ( next 6 months) |
Price per square metre |
|
Melbourne |
5.3% |
6% |
$565 |
|
Sydney |
9.6% |
9.2% |
$1,000 |
|
Perth |
3.3% |
4.5% |
$840 |
Data from Colliers International
Inside WA’s resources boom Having already established itself as a valuable source of hard rock minerals and precious stones, in recent years the Western Australian economy has also become a growth area for oil and gas, predominantly Liquefied Natural Gas (LNG). Of the five LNG projects involving Australian operators which received a final investment decision last year, three were in Western Australia, including Wheatstone (A$29 billion), Prelude Fields (A$10.3 billion) and Ichthys (A$34 billion). The Ichthys project off north Western Australia will include a 900-kilometre underwater pipeline, the longest in the world, to Darwin where the gas will be processed. The project is owned by Tokyo-listed Inpex Corporation and the French oil and gas multinational Total. The project has the potential to meet 10 percent of Japan's LNG needs, which are likely to grow as Japan turns away from nuclear power following last year’s earthquake and the nuclear leak at Fukushima Daiichi nuclear plant. Allen & Overy have been advising the sponsors of the project and expect to be doing more work as the project develops. “We are the overarching legal advisor on that project and have had partners working on it out of Tokyo, Sydney and Perth,” says A&O Perth managing partner Geoff Simpson. According to Allens’ oil & gas partner Anthony Patten, Australian gas is seen globally as a ‘premium product’ because of its reliability and also because of its economic cost. However, one of the biggest potential risks to Australia’s LNG success is the United States, where gas is priced substantially lower. "The price of gas in the United States is about US$2.50 per unit,” states Patten. “The price going into Asia is between A$15 and A$18 per unit. Depending on what happens to those prices, and if someone can work out a way of getting that gas from America into Asia at those prices, then that could have an impact on Australian operations." Patten does not expect this to be a serious threat as the United States manufacturing industry is heavily reliant on the low cost of domestic gas, and if it were to start sending gas overseas, it would have to increase the price which would be “politically unpopular”. However he believes that Australia’s gas is unlikely to drop in price any time soon as there are a limited number of contractors and workers to complete the projects tabled, therefore pushing the cost of projects up. Another aspect of LNG set to keep legal advisors in the market busy is the M&A work associated with these billion dollar projects. Woodside Petroleum recently announced it was selling 14.7 percent of the A$30 billion Browse project off Western Australia for A$1.9 billion to Japan's Mitsubishi Corporation and Mitsui & Co. The sale saw Woodside’s share of the project fall from 46 percent to 31.3 percent. The Japanese Government together with a consortium of Japanese companies are also set to buy a 10 percent stake in Chevron's Wheatstone LNG project for A$4.35 billion. The project is valued at A$29 billion and has been forecast to produce as much as 8.9 million tonnes of natural gas annually, beginning 2016. "I think we will see a bit more divestment activity, as more companies spread their project risks and financing commitment,” explains Patten. “More owners bringing in partners to help get projects to their next stage – there are lots of willing partners around." Simpson agrees: “Firstly because the Japanese are being more aggressive in their acquisition of energy assets and also because there are a number of players in the market who will have to sell interest in their projects in order to meet their funding requirements while the capital and debt markets remain tight,” he says. Hard rock While there is a lot of excitement in the market about the potential of LNG, hard rock mining and infrastructure are not about to fall off the wayside any time soon. For example, Hancock Prospecting’s Roy Hill iron ore project is valued at A$9.5 billion and is set to create more than 3,000 jobs during its construction in the Pilbara region. BHP and Rio Tinto are also highly active in the market, although both have cast doubts in recent times about future Australian expansions, such as BHP’s mooted A$20 billion expansion of its Olympic Dam copper-uranium mine in South Australia or Rio Tinto’s outer harbour Port Hedland iron ore ship-loading facility. However, the impact for law firms may not be as great as initially expected even if these projects do not proceed. According to Simpson, because their projects are self funded and they have large in-house capabilities, the BHP/Rio mega projects do not involve the same volume of legal work for law firms as with other projects, such as the Roy Hill and LNG projects. “Our work is mainly focused on the new developments where there is work around project development – that is where the big ticket legal work lies,” he explains. What is, however, generating a volume of legal work is the development of ports and rail capabilities in the state to service the growing mining industry. The Oakajee integrated port and rail project, a A$3.5 billion undertaking, continues to be one of Western Australia’s most significant projects due to its role in opening up the mid-west iron ore region, allowing a number of projects to come online and supply ore to international markets as economically as possible. Developments currently proposed around Western Australia’s existing and newly planned ports total A$80 billion, and this investment level is expected to continue into the future as ports reach their tonnage limits. Along with mining related infrastructure the legal fraternity is also busy working on social infrastructure in the state such as the Perth Waterfront project, a A$440 million dollar state government redevelopment along the Swan River, and a number of public infrastructure projects such as the New Children’s Hospital and the WA Gateway road project. “There are a number of public projects that will have a major impact on Western Australia,” says Freehills Perth office head Jason Ricketts. “We have roles on a number of those projects.” Projects breed disputes A number of projects in the Mid West have already been highlighted in the media as potential litigation cases as a result of budget and schedule overruns and even cancellations. “Some of the projects being undertaken in Western Australia are immensely complicated, therefore the scope for litigation and dispute is there,” says Lavan Legal managing partner Gaunt. An increasing volume of litigation and dispute resolution work in the market has prompted Allion Legal to appoint a litigation partner after years of referring this work to other firms. “The big area of growth we see for us in the coming 12 months is the move into litigation,” says managing principal Phil Lucas.
One of the key factors likely to feed disputes is that companies are agreeing to undertake work without first having the necessary skilled labour to complete the work, according to Gaunt. “If all the projects are to go ahead we need the people to do it,” he says. Lucas agrees that the sheer volume and size of projects being undertaken at the same time is putting a strain on the labour market, and therefore the cost of completing a project is changing. “The cost of getting business done and the ability to find people to get the business done is a major issue for our clients,” he says. During the past decade a lot of the international work undertaken by firms in the market was inbound investment, but now a growing number of Australian-based companies are heading offshore in search of resources in jurisdictions in Africa and South America. “We work for quite a few clients who are busy looking overseas for projects,” says Lucas. “The industry in Western Australia is relatively mature, so a number of clients have gone overseas in order to purchase or establish new projects there… we anticipate that the level of activity will continue. “There will still be inbound work, but I think less so as Australia is increasingly hard to do business in from an outsider’s perspective.” By contrast, Jackson McDonald is actively targeting inbound work: “We have some opportunities to service our clients overseas on project/contract needs, in Asia, South America and Africa; but our strength is our offering in Western Australia,” says CEO John McLean. “We expect an increasing flow of this work during the next 12 months.”
