The Age: East West Link: The case against this road gets ever stronger. July 28, 2014, Kenneth Davidson, Senior columnist at The Age
It is just over three months since Dr Nick Seddon, an adjunct professor at the ANU College of Law and the author of a standard text on government contracts, delivered a widely publicised paper pointing out that “sovereign risk” does not apply where governments choose to break contracts and remain subject to legal remedy in the form of compensatory damages.
The paper was given against the background of claims by both the Victorian Coalition government and the Labor opposition that the contracts for the Wonthaggi desalination plant and the intended contract for the East West Link, once signed, could not be broken due to sovereign risk.
The East West road project was examined and found wanting by Infrastructure Australia. The previous federal Labor government accepted that advice, refused federal money for the project and instead approved $1.5 billion assistance for the Metro Rail tunnel which would have capacity to shift the passenger equivalent of 24 lanes of freeway. The Abbott government, by contrast, rejected the advice of Infrastructure Australia and has promised $3 billion for the East West Link, consistent with the Coalition’s federal election commitment to fund roads, not public transport.
Infrastructure Australia staff have circulated a report, Spend more, waste more, Australia’s Roads in 2014, to transport industry experts for comment. The report argued that the existing level of road expenditure was unsustainable and unjustified.
No East West Link business case has been published, because it depends in part on increasing car dependence at the expense of public transport. This, in combination with Planning Minister Matthew Guy’s Plan Melbourne, will create gridlock. Guy’s plan envisages an extra 1.3 million people by 2020, housed mainly in inner Melbourne (200,000 dwellings) and middle Melbourne (600,000 dwellings), and each household requiring one or two cars, given the absence of concomitant investment in public transport.
If the East West Link goes ahead there will be no money for public transport for at least a generation, irrespective of political promises.
The Seddon paper said that “sovereign risk” was a political perception, but the legal issue was straightforward – the government can break the contract. In response, shadow state treasurer Tim Pallas backed down slightly. Answering a question from The Age, he said: “While tearing up the contract would break no law, it would risk damaging Victoria’s strong credit rating and add to the cost of borrowing”.
What if it did, and Victoria’s rating was reduced from AAA to AA? Victoria’s total financial liabilities are $35 billion. The downgrade would increase the interest rate burden by 25 basis points, or $90 million a year. If the contract went ahead as a public-private partnership (PPP), the “availability charge” necessary to finance the eastern half of the link would be about $900 million a year (to yield the private partners a return of 10 per cent over 25 years) or, if it was financed by public borrowings, about $500 million a year based on a 4 per cent cost of public borrowings.
According to the only published benefit-cost analysis for the East West Link, by the Eddington report in 2008, the benefit-cost ratio was 0.45, indicating a return to the public of 45 cents for every dollar spent.
This would mean that each year, the project would be imposing a net burden on the Victorian taxpayer of about $400 million if financed as a PPP, or $220 million if it was financed by public borrowings – plus incalculable damage to Melbourne’s liveability.
There is no need for Labor to wait for the contract to be signed. If Pallas announced that an incoming Labor government would “tear up the contract” after the election, the compensatory damages would be minimal.
The finalists left in the bidding process would almost certainly sue the government for the costs of preparing their proposals. Based on compensation of up to $12 million for the unsuccessful consortium that didn’t make the final cut, the Victorian taxpayer would have to pay out tens of millions of dollars. But in terms of the billions of dollars saved, and the alternative transport uses to which that money could be put, there would probably never have been taxpayer money better spent.
The financial, economic and environmental arguments in favour of the East West Link are fallacious. There is little community support for it, and Labor is likely to lose three inner-suburban seats to the Greens if it continues its de-facto support for the project.
The risk is that the banks and the financial institutions that stand to earn multi-billion-dollar rents over the next couple of decades if the link goes ahead as planned will fight a ferocious rearguard action to protect their interests.
In contrast to the desalination plant – a large but benign white elephant, hidden from sight and unused near Wonthaggi – the East West Link, if built, will be a ferocious woolly mammoth that will make life hell for future governments as well as Melburnians.
Kenneth Davidson is a senior columnist for The Age. Email: email@example.com