East West episode an absurd waste

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East West episode an absurd waste Jennifer Hewett

The whole episode has been an absurd waste of opportunity, of money and of very valuable infrastructure. Josh Robenstone

Naturally, Victorian Premier Daniel Andrews refuses to call a direct payout of $339 million “compensation”.

According to the strictest interpretation, he may be right. The in-principle good faith agreement to pay a consortium of national and international construction companies is for costs those companies have already incurred.

Costs that are now wasted as part of the state Labor government’s determination to ditch Melbourne’s East West Link toll road.

Given the figure of $1.2 billion in compensation originally in dispute, the outcome is better for taxpayers than it might have been.

But Andrews is certainly wrong in describing this agreement as “the best possible result”. The whole episode has been an absurd waste of opportunity, of money and of very valuable infrastructure.

The real costs won’t be quite so obvious or immediate. They will definitely add up to much more than $339 million, especially over time.

It’s not just that $339 million doesn’t include the previous Coalition government’s own sunk costs of hundreds of millions of dollars’ worth of acquisitions and work on the project.

POLITICAL, COMMERCIAL DEBACLE

Nor the $81 million in financing fees for a $3 billion credit facility, which the Victorian government says it will now renegotiate with banks (at so far very uncertain cost) so the facility can be used to fund other infrastructure. Nor even the offer of $3 billion in additional federal funding from the Abbott government to pay for the East West Link – now withdrawn.

It’s that the East West saga counts as a political and commercial debacle for a country that urgently needs better infrastructure, including the jobs that go with building it, at lowest possible cost.

The immediate response from the Abbott government was predictable, particularly given its assessment there are no other big “shovel-ready” projects in Victoria. The Melbourne metro rail project proudly cited by the Andrews government as an alternative can’t begin for a few years at the earliest. It has no start date. That’s not helpful for a state desperate to boost skilled jobs ASAP.

The Prime Minister and the Infrastructure Minister, Jamie Briggs, also said the “reckless” decision to abrogate contractual responsibilities set a dangerous precedent for future projects and threatened further investment.

Actually, this deal probably doesn’t directly threaten much future infrastructure investment. A range of construction companies, international or domestic, are usually available to bid for more major work in Australia. It’s the price at which they are willing to do so that is the real issue.

In a statement, consortium members described the deal as a satisfactory resolution and noted they “look forward to pursuing future projects in the state of Victoria”.

But with Victoria now having the dubious reputation of not honouring a signed contract, the cost of any new infrastructure project and bid will inevitably go up.

SOVEREIGN RISK NOW LINKED TO AUSTRALIA

That’s because it will now be necessary to take into account risks that no financiers or companies thought had to be considered when dealing with Australian governments. That added risk – and added cost – will also be factored in as companies decide just which projects to bid for around the world.

The political brawl over the East West contract may have been an unusual circumstance, but it means the admittedly vague concept of sovereign risk is now linked to Australian government infrastructure deals for the first time. And to the extent any infrastructure company has the option of undertaking potential and expensive bids in different countries and has to choose between them, the Australian option will have another mark against it.

Negotiating a “good faith” deal is certainly better for the state’s reputation (as well as the country’s) than the government’s threat to introduce legislation as a way of avoiding compensation. This was after the former Napthine government signed the contract for the last year just before the November state election. Despite Labor’s insistence it would not proceed if it won office, the government also added a poison pill side-letter that effectively allowed for massive compensation payments as part of the attempt to ensure the toll road went ahead.

As a new premier, Daniel Andrews was clearly willing to contemplate legislation as part of his determination to force the consortium to negotiate and agree to a deal ahead of the state budget on May 5. He says legislation was never his first preference and that there would have been a consequence for such a course of action.

But there will still be a consequence from this particular fix too. The East West consortium was formed by Lend Lease, Spain’s construction giant, Acciona, France’s construction group, Bouygues, and infrastructure financing specialist, Capella Capital.

FORMAL COMPLAINTS FROM FRANCE, SPAIN

The governments of Spain and France have both formally complained to the Victorian government over its treatment of the successful tenderers. That is not lightly done by governments and the impasse in Victoria has certainly gained attention in international construction circles.

The Andrews government now says it will legislate to avoid contracts being signed too close to an election so that this situation can never happen to another government. None of this will affect the state’s AAA credit rating, it insists.

The government will effectively take over the project company for $1, with assets transferring to the state. The deal avoids the prospect of future penalties and means, according to the government, the relationship is terminated and the matter is “settled”.

Victorian Treasurer Tim Pallas said it wasn’t a day for celebration.

“The previous Liberal government deliberately left Victoria with only a handful of options – none of them good.”

In the end, Labor didn’t pick the worst option – legislation. It didn’t pick the best either – known as honouring a contract.