The Age: Have we really dodged the East West Link bullet? September 28, 2014. Kenneth Davidson. Senior columnist at The Age
It is a brave government that challenges the power of the banks or the gambling interests of James Packer. Photo: Wayne Taylor
It looks as if Melbourne has dodged the East West Link bullet. Almost. Providing the opinion polls hold up and Labor wins the state election in November, with Greens support in the upper house, the $8 billion first stage of the road is unlikely to go ahead.
The main problem is the opposition is reluctant to come out and say unequivocally that if it wins the election it will cancel the contract. Labor is saying it doesn’t have to do anything. It is relying on a case to be brought before the Supreme Court in December – after the election – on behalf of the Moreland and Yarra councils.
The councils will argue the contract is invalid because of a flawed approval process. The opposition has advice from a team led by a former Federal Court judge Ray Finkelstein that the contract as it now stands is invalid and thus no compensation would be payable to the successful consortium led by Lend Lease.
But what if the Supreme Court found the contract was valid and, even worse, the claim for compensation was upheld?
Normally compensation for broken contracts is limited to the costs incurred up to the time the contract was broken – in this case no more than $20 million tops.
But the government could be liable for as much as $600 million if a $500 million “kill fee”, plus an “uncertainty component” of more than $50 million are inserted into the financial agreement at the wishes of the public/private partnership negotiators. Also, as was disclosed in an earlier, unsuccessful court action brought by a private citizen, unless the construction contract is finalised by 10am today, a $145 million penalty will be imposed to compensate for exchange risk.
All this is on a par with the $200 million “poison pill” clause written into the Crown casino’s gaming licence extension – the penalty a future state government will have to pay if measures to ameliorate problem gambling (which according to the Productivity Commission generates 40 per cent of gaming revenue) adversely affects Crown’s profits.
The fact that the opposition did not oppose the poison pill in the Crown licence extension, combined with its reluctance to unequivocally oppose the East West Link, suggests Labor may be tempted to use the excuse that breaking the contract would be too expensive if the Supreme Court finds the contract legally valid.
It is a brave government that challenges the power of the banks or the gambling interests of James Packer. An incoming Labor government’s only protection is to take an unequivocal stand before the election on its determination to cancel the road contract.
As Nick Seddon, the ANU law professor and author of the standard text on government contracts, has pointed out a sovereign state government can legislate to shut down a contract, including special fees such as the $500 million “kill fee” which is just part of the contract.
Seddon says the magnitude of the alleged fees sounds a warning: “Assuming the contracts are cancelled before any major work has been done, the substantial make-up of the fee must be pure profit. Is the state of Victoria really about to sign contracts of this nature?” he asks.
The answer appears to be yes, and for the crassest political reasons, which suggests the Napthine government has forfeited the right to manage the state’s public finances. It would effectively suck the oxygen out of a sensible infrastructure program for Victoria for at least two generations.
A public/private partnership deal costing $8 billion and yielding an average return of 10 per cent over 25 years would cost $21.8 billion, or $872 million, a year. The government would be saving money from year one by cancelling the contract – even if felt compelled to pay compensatory damages, no matter how phoney the damages were in reality. Even a one-off payment of $745 million to pay off all Napthine’s poisoned pills sure beats $2.8 billion for a dud contract which, according to the Infrastructure Australia cost benefit-analysis, will return 50 cents for every dollar invested.
The Wonthaggi desalination plant is costing about $6.5 billion, or $640 million a year, under its contract. That is taxpayer money going into the maw of the financial industry which should by rights be used to finance infrastructure for a growing population. Surely one white elephant is enough.
The Baillieu/Napthine government missed two chances to reduce the financial burden of the useless desalination plant. It could have renegotiated the contract when the private consortium AquaSure missed the completion date by 12 months. Then the government failed to exploit the fall in official interest rates to refinance the contract.
Now, its pigheadedness in refusing to take the sensible option to back off the East West Link because it can’t produce a business case that could stand public scrutiny, has destroyed its claims to superior financial sagacity.
Kenneth Davidson is a senior columnist for The Age.