East West Link deal months in the making

[ A+ ] /[ A- ]

The Age: East West Link deal months in the making Josh Gordon April 16, 2015

A deal to end the East West Link contract was finalised just minutes before it was announced in a press conference by Premier Daniel Andrews on Wednesday morning after a frantic night spent collecting signatures from around the world.

But the extraordinary final haste provided little insight into the months spent thrashing out the agreement. As one insider put it, negotiating was painfully incremental, with the agreement edging forward.

Talks began before Christmas. Initially, the two sides were so far apart a deal seemed impossible.

At one end of the spectrum were members of the consortium demanding about $1.2 billion in compensation. This, after all, was the amount stipulated in the contract, and further guaranteed by the Coalition’s unusual side letter promising to pay up even if a court rendered the contract invalid.

The position of the consortium, which included international companies that cared not a hoot for provincial Australian politics, was simple: a contract is a contract. These businesses wanted their money.

At the other end of the spectrum was Labor. Newly elected, and having promised no money would be paid beyond basic costs already incurred, the new government initially refused to hand over even a cent.

According to another source intimately involved in the process, it took months to reach a situation where both sides were prepared to even consider alternative positions. There were numerous views – not only between the various companies involved in the consortium, but within individual companies.

“The herding cats analogy is over-used, but it probably makes sense on this one,” said one observer.

To understand how both sides somehow arrived in the middle, we need to go back to September 2014, when Labor announced it would be scrapping the road no matter what, claiming the contract was not worth the paper it was written on.

Labor’s argument at the time was complicated, hinging on legal advice it was handed by former Federal Court judge Ray Finkelstein, among others.

It concluded that if Supreme Court action being waged by Moreland and Yarra councils against the project were successful, the contract would be “unenforceable”.

Because the councils’ legal case was not due to be heard until after the election, Labor said if it won the election, it would support the councils’ case rather than defend the project. Hence the councils’ legal case would likely succeed, rendering the contract invalid. That was the theory, at least.

It was a tricky argument, but in reality it was never really likely to stand up. What a difference an election win can make. Instead of following through with its legal gambit, the new Labor government came to the painful realisation that the contract was indeed worth the paper it was written on.

That meant it would have to negotiate with the consortium if it had any hope of escaping from what had become an incredibly fraught situation.

Hence Labor hired financial adviser John Wylie and commercial litigator Leon Zwier to provide advice on negotiations.

Labor’s biggest bargaining chip was the threat that it might legislate to end the contract. Project specific legislation ruling out compensation could potentially deny the consortium – which had already devoted massive resources to the project – hundreds of millions of dollars.

There was also the fact that the consortium was headed by Lend Lease, a company which has more than a passing interesting in winning future contracts for major projects in Victoria.

On the downside, legislation to avoid compensation might have created an extraordinary precedent, making companies very wary indeed about doing business in Victoria.

In addition to Zwier and Wylie, the group included Lend Lease’s Steve McCann, who was intimately involved in Sydney’s troubled Barangaroo project, Lend Lease chairman David Crawford, as well as various bureaucrats from the Department of Transport and the Premier’s Department and the Treasury, and, from time to time, international representatives.

It was, according to one source, a volatile mix at times.

“Given the size of this deal and the number of people involved internationally it was remarkably quick. It was also remarkably fair, with no one devastatingly upset or elated.”

Just when the situation seemed desperate, it was Mr McCann from the consortium who came up with the idea that Labor would assume the debt facility for the project. The consortium had already drawn down $339 million, a liability which would now be adopted by Victorian taxpayers.

The government then came up with the idea of using the facility for other major projects including the Metro Rail Project, reasoning the money could be used to fast track other infrastructure proposals.

Finally, about a week ago, Andrews himself turned up for a meeting, which helped seal the deal.

The presence of the Premier finally persuaded the rival parties that it was time to sign the papers that would finally kill off the contract – just before the new state government’s first budget.