Brisbane 09

A booming Queensland economy has delivered record profits for Brisbane law firms, but future growth will depend on their ability to adjust to the changing demands of current and prospective clients.  ALB's Cabral Douglas speaks to some of Brisbane's leading lawyers about the state of the market

It was only this time last year that Queenslanders were celebrating the election of home-grown Kevin Rudd to the post of Prime Minister. The Rudd government inherited a booming economy from their coalition predecessors, and nowhere was this more evident than in the Sunshine State. Driven largely by the construction, energy & resources, and infrastructure sectors, with Perth, Brisbane has long shared joint status as Australia's fastest-growing city.

However, strong manufacturing, agriculture and an internationally recognisable tourism brand has provided the economic diversity necessary to withstand the current slump in commodities prices. This is one reason that, in spite of slowing demand for Australian resources, economists are predicting a 3% rise in economic growth in Brisbane next year. And, this figure may well exceed the national average for a 12th consecutive year, making Brisbane an excellent place for business in 2009.

Cooper Grace Ward managing partner Chris Ward refers to the current mood in Queensland as one of cautious optimism. "I have spent a fair bit of time throughout the country - particularly Sydney - in the last couple of months," he says, "and I have to say the mood in Queensland is far more positive. Notwithstanding the current economic difficulties, there is still a degree of optimism there. "From our firm's point of view, we are at the top end of the SME market, which remains very strong. We have large practice groups in the areas of insurance, family law, litigation and industrial relations, and our client base across the board is largely continuing doing what they have been doing ... and we are still extremely busy at the moment," he adds.

However, according to Carter Newell partner Patrick Meade, world financial forces have dictated that this is no time for Brisbane practice groups to become complacent. "A certain area of work may start to fall away and the firms that will do well are the ones that are fleet of foot - in terms of internal management and adapting practice areas as a result of slow-downs in others," he said.

Construction

If the rate of new construction work is any indicator of broader economic trends, 2009 could see back-end construction work and dispute resolution emerge as major drivers of growth, in addition to government, competition, infrastructure and funds management, according to firms ALB spoke to.

Mills Oakley CEO John Nerurker stated that construction projects worth A$300m and over have certainly been withdrawn, and that's where most of the firm's Brisbane construction work was coming from. "The advice we have provided since March has substantially reduced in terms of new contracts," he added.

However, for Mills Oakley's Brisbane office, which focuses on construction, commercial litigation and insolvency, the sharp reduction in large-scale new construction projects has had a counter-cyclical effect. That is, during the last 10 months, the firm has enjoyed an increase in advice on existing contracts and back-end construction work, and this has meant revenue streams have remained largely unaffected by the recent downturn.

According to partner Peter Mills: "Advising on existing contracts, rights of suspending works and dealing with disputes as to payments or defects has increased ... as well as the volume of smaller building contracts that has grown in relation to the recovery of payments to builders. "Building and construction skills (on the front end) are knowing what to put into a contract to protect you when times get bad. Then, on the back end, there are the skills to enforce those rights (if things go badly) - so it's fairly recession-proof in that regard."

The diversity of legal skills in the firm's Brisbane office is positioning Mills Oakley to continue its rapid growth rate. Its commercial litigation and insolvency practices work under the banking & finance recoveries group, all of which are traditional growth areas in tightening markets. "Normally you are either working for a bank or against a bank. Since we opened in February last year with four people, we are now at 27," he said. "Whether you're building something or trying to get paid for having built something, you require the same knowledge and skills set from your lawyers. Then, the other process of acting for a liquidator or creditors has tripled in the last seven months," he adds.

According to Mills, the pressure the building sector is currently under may be a good thing for more competitive pricing in the area. "We have to be honest and say that perhaps the more stress put on building companies, the better the price they quote for a job... Building costs have become extremely expensive compared to the last three years," he says. "What we might be seeing is a rationalisation, a more competitive pricing for building tendering... so you might not necessarily see a decline in numbers of buildings, it's more that lower prices are tendered - with interest rates going down. Builders are going to be eager to get as much cash as possible, so they will be more competitive."

M&A

Another area of practice that will be of interest to Brisbane firms across the board is M&A activity. Last year, despite market conditions that made debt difficult to obtain, Queensland was the scene of large-scale M&A activity - including BG's A$5.6bn takeover bid for Queensland Gas, among others. Notwithstanding market reports suggesting a slow-down in activity, Holding Redlich's Brisbane managing partner Michael Byron remains optimistic. "In the past months it has been quietening down. January will be quiet, but come mid-February we will see more activity," he said. "I expect a slower than usual New Year, which should pick up once more clients create new strategies, consider more rationalisation - or even decide to merge."

Herbert Geer partner Ian Commins is in agreement. "In light of the economic situation, I think you will see a vertical integration of people in the supply chain at different levels of control of the supply process. I am also expecting there to be more integration to create synergy or to create economies of scale in order for companies to secure their own survival during the economic downturn," he said.

Resources

Another development firms are keeping a close watch on is the waning confidence in the coal market. "To a large extent, the real economy in Queensland is driven by the price of coal," said Meade. "At Gladstone we are going have the world's biggest coal-exporting port in the world."

The completion of Stage 1 of the Wiggins Island Coal Terminal, set for 2010, will boost the port's coal export capacity by 20 million tonnes each year, making it - indeed - the world's largest, and creating plenty of opportunities for lawyers in the process. However, according to Meade, sliding coal prices are threatening to derail these plans. "If they continue to fall, the effects could be devastating for the Queensland economy. The main concern is that the Chinese economy is going to back off. If demand for coal were to reduce, it would have an enormous effect on the state itself," he said.

Clayton Utz energy & resources partner Darren Fooks is less concerned about the impact China's diminishing appetite for Australian coal would have on Brisbane firms operating in this space. "Out of all the coal exported from Queensland, 38% went to Japan," he said. "How much do you think was exported to China? Just 3%!"

For law firms operating in this arena, it all comes down to who your clients are, the economics of their projects and their market position. "There are two types of projects that may fall into difficulty. There are those that have marginal economics and those dependent on debt financing," he stated. "We are mainly involved in large projects, most of which are cashed-up. And the economics are not dependent on short-term commodities prices, but rather they have taken a medium- to long-term view."

Clayton Utz has the largest energy & resources practice in Queensland, and it has appointed another two partners and seven more lawyers in the last 18 months. "We are flat out at the moment. We have seen absolutely no change in the flow of work," Fooks said.

Ward is also taking a longer-term position. "The fall in coal prices is going to mean a drop in royalties in terms of what the government receives, so to a certain extent it is going to be vicious circle. However, I would like to think - certainly from a federal and state point of view - that everyone is looking at the bigger picture. I would also like to think that by the end of 2010/2011, things would have returned to some sort of normality, so I would not expect there to be too many short-term positions made."

Infrastructure

Brisbane's population growing faster than any other Australian city coupled with the requirement to increase capacity to transport natural resources intensifies the need for infrastructure development in terms of energy, water, transport, health care and other facilities to keep pace, and this must mean that firms practising in this space will continue to be busy.

However, in spite of the widely anticipated cooperation between state and federal Labor governments to fund large-scale infrastructure projects, there is some concern about the capacity of the private sector to underwrite them. "There has always been a lot of infrastructure interest in PPP with a wide range of infrastructure projects, but it's going to be difficult to source the capital over the next two years, given that share prices in companies participating in that market, like Babcock & Brown and Macquarie, have fallen quite substantially," says Patrick Meade.

Notwithstanding the private sector's diminished ability to raise finance, Brisbane firms ALB spoke to are expecting activity in this area to remain steady, fuelled largely by government spending. Says Herbert Geer Brisbane's chief executive partner William Fazio: "The recent Brisbane Airport Link is an example of the major infrastructure investment taking place on Australia's east coast." He says there is clearly a huge demand for both social infrastructure, projects for clean power and better use of water resources. Other plans in the pipeline expected to go ahead include the Wiggins Island Coal Terminal, the Surat Basin Railway, the Logan Motorway, the Port of Brisbane Motorway, Gateway Duplication and also several pipeline projects - just to name a few.  

While managing partners are facing internal management issues in pursuit of directing resources to appropriate practice areas - and this is ongoing - the fate of the Brisbane legal market will be somewhat dependant on commodities prices, the ability to raise finance in a tightening credit market and the fate of the many infrastructure projects currently on the agenda. Outside this sphere, dispute resolution, insolvency, workplace relations and wealth management are tipped for strong growth in Brisbane in 2009. ALB