Managing the risk of East West Link a fraught business

The Age: Managing the risk of East West Link a fraught business. September 23, 2014, Josh Gordon, State political editor for The Age.


Interpreted one way, the inclusion of a “kill” clause in the East West Link contract might be seen as an attempt to booby-trap the deal.

If Labor wins and the project is dumped, the contract would explode spectacularly for the Victorian taxpayers forced to pick up a $500 million bill for a road that is not being built.

It is all about uncertainty. Labor effectively introduced an enormous new element of financial risk for the consortium the minute it publicly promised to dump the project if it wins – even if contracts are signed before the election.

The simplest way to mitigate this risk for the government, taxpayers and the consortium would be simply to delay signing anything until after the election. The problem would vanish because there would be certainly. To gain this certainty, a delay of two months or so might seem like a small price to pay.

Unfortunately, for purely political reasons, delaying is not an option for the Napthine government, which has staked its political credibility on the idea that the project must be locked in before people vote.

As a result, the East West Connect consortium, led by construction giant Lend Lease, must manage a binary question upon which billions of dollars depend: which side will win the November 29 election?

The consortium’s desire to transfer as much risk as possible is understandable. Businesses manage risk.

Typically contracts manage risk – in part – using “termination for convenience” clauses.

Such clauses are designed to ensure that various unavoidable costs are clawed back and there is nothing particularly unusual about them. What would be unusual is if such a clause also attempted to recoup lost future profits. A “termination for convenience” clause that involves a $500 million payment might be seen as an attempt to do that.

There is still an enormous amount we don’t know about his project. A big lingering question now is whether the bureaucrats responsible for negotiations react, particularly given the tight time frame required.

You’d like to think they would insist on a contact that is drawn up in the broader interests of Victorians rather than the political interests of the government, but in all probability we won’t know until after the November 29 election, and by then it might be too late.

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