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From the Desk of the Executive Director

Ken Phillips is co-founder and Executive Director of Independent Contractors of Australia. He is a published authority on independent contractor issues and directs research on related commercial and trade practices issues. Through his numerous articles in newspapers and think-tank and academic journals, Ken is known for approaching issues from outside normal perspectives and is frequently sought out for media comment.

Something doesn't add up in the East West Link settlement

Thursday, April 16, 2015

The announcement by the Victorian Premier, Daniel Andrews of the ‘settlement’ to not go ahead with the East West road link has all the signals of a significantly incomplete picture.

There are three major components to the cancellation costs confronting the government. The first is to pay out the construction consortium, East West Connection for the costs they have incurred in starting the project but having it cancelled. Some $339 million has been agreed and allocated to this, the government says.

The second is the government’s upfront costs for land acquisition, project development and bid costs already spent or committed. The government hasn’t mentioned these but the opposition has and puts the figure at $400m to $500m. The opposition would know because they were in government when these costs were incurred.

The other component, potentially much larger, is compensation to the financiers of the project. What agreement has happened on this is impossible to identify. In a carefully worded statement that says little, the government announced that a further $81m is being ‘absorbed’ in fees in relation to a ‘credit facility’ that was organized to borrow the project costs. It becomes guesswork as to what this actually means but is where the big questions remain.

Original speculation for the total compensations costs was around $1.1 billion. The payout of $339m for sunk construction costs probably makes some sense. That leaves potentially around $700m of finance costs open to question. The government seems to be saying that the $81m is the settlement on the cancelled finance arrangements. If this is what they are saying it’s a pitch that’s hard to believe.

It doesn’t makes sense that international financiers holding allegedly iron-clad contracts would agree to settle a locked in $700m (say) claim for $81m. It’s illogical. But from a purely speculative perspective, it would be logical if the government agreed to finance future projects, say the Melbourne Metro (train) Link, using those same finance companies. In fact, the government has announced that’s what they have done. A $3bn credit facility established for the road project is now to be used on the Metro Link job.

What emerges is that the real compensation for the cancelled East West Link could then be hidden within the financing costs of the Metro Link project. The Victorian voters would be kept ignorant.

Of course, it has to be emphasised that this is entirely speculation raised with the intent of asking questions. There’s simply not enough detail or disclosure from the government to enable a proper understanding to be achieved.

But consider this: why would the government use private debt financing for the Metro rail Link when, with an inherited AAA credit rating the government could issue bonds at much lower costs to raise the needed money? It doesn’t make sense unless there’s been an expensive payout deal done over the East West Link financing.

What the announced $420m settlement from the government allows, however, is for the May Victorian budget to be put to bed. The Victorian Auditor General who oversees the budget integrity process is able to sign off that there are no outstanding unresolved debt issues. Whether there is some other allegedly future debt-financing arrangement doesn’t supposedly affect this budget's figures. If there is reference in the 1000 plus page budget papers to future debt commitments it would probably require a specialist forensic accountant to identify and understand the reference.

If this scenario rings true the most likely outcome is that no-one will ever know if there has been a debt transference arrangement put in place. Unless the government decides to be totally transparent and put all documentation on the table, there remains a big unanswered question. 

[First published in Business Spectator, April 2015]

Roger Lewis commented on 28-Apr-2015 04:47 PM
The opposition needs to hammer this home. The ABC and Fairfax press will not pursue it.

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