East West builders demand $500 million kill fee

The Age: East West builders demand $500 million kill fee. September 23, 2014. Mark Hawthorne, Adele Ferguson, Josh Gordon

The consortium negotiating to build Melbourne’s East West Link toll road is seeking a $500 million kill fee in its contract with the Victorian government, after Opposition Leader Daniel Andrews vowed to block the project should Labor win power at the November state election.

The East West Connect consortium, led by construction giant Lend Lease, wants the half-billion dollar kill fee included to protect it from what insiders called “the enormous sovereign risk” now attached to the toll road, in addition to the estimated $40 million of costs already incurred while working on the Napthine government’s signature project.

Earlier this month Fairfax Media revealed the East West Link would be dumped if Labor wins the election, even if business contracts to build the road have already been signed.

Labor says it would use a looming court battle to render the contract for the eastern section of the project invalid. The extraordinary move follows high-level legal advice from former Federal Court judge Ray Finkelstein, administrative law expert Richard Niall QC, and contract law expert Siobhan Keating.

The East West Connect consortium, which also includes Capella Capital, Acciona and Bouygues, has since taken is own legal advice and believes it has a strong legal case should Mr Andrews follow through with his threat to tear up the contracts.

They have been informed that any contract signed with the Victorian government will hold, even if Mr Andrews assumes power after the November election, and legal action would be “very short, and very successful” in favour of the consortium.

Another executive linked with the consortium told Fairfax Media the contract would “almost certainly” include penalty clauses and rights of action.

The total cost of the East West project is estimated at up to $8 billion, including $5 billion of construction costs to be paid to the winning consortium.

Negotiators for the Lend Lease consortium, who believe the project will reach “financial and contractual close” before the election, want a $500 million kill fee. It has calculated the kill fee at 10 per cent of the $5 billion construction cost of the project, and say it represents their lost profit.

Negotiators are also asking for an “uncertainty component” of more than $50 million, which includes a calculation of the potential cost of contractors, equipment and staff sitting around doing nothing until the legal issue is resolved, should Labor win power.

That means, should the ALP dump the project, the Lend Lease consortium could receive up to $600 million from Victorian taxpayers without having to actually build the toll road.

In order for the East West Connect consortium to be paid the kill fee, a number of hurdles must be crossed. These include a court win for the councils opposing the toll road, and a refusal by the ALP to appeal that decision.

“The legal action has to be successful and the ALP has to win. If that happens and they then say they won’t honour the project, the consortium will then go to the newly elected government and say pay us for the lost profit,” a source close to the negotiations said.

The kill fee mirrors a $200 million poison pill clause written into the Napthine government’s deal to extend Crown Casino’s gaming licence in Melbourne. Under that deal, the government could be liable to pay Crown compensation of up to $200 million for regulatory changes, including future problem gambling or smoking changes, that have an adverse impact on Crown.

Labor last week announced it would honour that contract with Crown.

Treasurer Michael O’Brien refused to comment on negotiations with the East West Connect consortium, instead referring all questions to the Linking Melbourne Authority (LMA).

An LMA spokesman said: “LMA is in confidential discussions with East West Connect as the preferred bidder and we will not be commenting on any aspect of those discussions.”

Despite the uncertainty over the negotiations, a source close to the consortium said he believed the contract would go ahead.

It is believed the contract is likely to be signed next week. Because of court action already underway, the government has agreed not to sign contracts on Wednesday. Labor is refusing to back down despite warnings about the financial risks.

Shadow Treasurer Tim Pallas on Tuesday insisted the project’s “dodgy contracts” were not worth the paper they’re written on, although he did not respond to specific questions about the risks to taxpayers associated with a possible kill clause.

“In November, Victorians will get to decide between Denis Napthine’s $8 billion dud tunnel or Labor’s plan for better public transport and removing 50 level crossings,” Mr Pallas said.

Brendan Lyon, chief executive of peak infrastructure lobby group Infrastructure Partnerships Australia said cancelling the East West Link would be a very expensive error for Victoria because it would miss the opportunity to deal with freight and congestion requirements, and because it would harm Victoria’s reputation as an investment destination.

“The East West corridor is politically contentious in the few inner urban seats above the route, but it’s in the national and state interest that it’s delivered,” he said.

Mr Lyon said the East West was the centrepiece of Labor’s own transport plan in government, and had its genesis in Sir Rod Eddington’s study of Melbourne’s transport requirements.

“Victoria has a hard-won reputation as one of the best infrastructure jurisdictions in the world, a reputation that would be dented if this project were to be cancelled,” he said.

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